Mid-year HSA Changes: How Status Affects Annual Contribution Limits

It’s important to understand the rules that come with having an HSA, especially contribution limits. Here we’ll dive into the basics of contribution limits, plus the nuances that come up if you gain or lose HSA eligibility throughout the year.

A health savings account (HSA) can be a great way to save money for medical expenses. It is important to understand the rules and regulations that come with having an HSA. In this article, we’ll dive into the basics of HSA contribution limits. We will also break down all the nuances that come up if you gain or lose HSA eligibility throughout the year.


HSA Eligibility

Being eligible for an HSA means you currently have the qualifications to open and contribute to an HSA. It doesn’t mean that you already have an open account or that you can contribute indefinitely.

The main factor that makes you eligible for an HSA is being enrolled in a qualified high deductible health plan (HDHP). There are a few other factors that come into play as well. If you aren’t sure if you’re eligible, check out our complete guide to HSAs.

Below is a chart detailing 2021 HSA-qualified health plans:

2021 qual hdhp table

HSA eligibility always starts on the first of a month. For example, if you enroll in a HDHP on June 15, and you meet all eligibility requirements, you will be HSA-eligible on July 1.

HSA Contribution Limits

There are a couple of factors that affect how much you can contribute to your HSA. Contribution limits for HSAs depend on your age and whether you have family or individual only coverage. Contribution limits apply to the calendar year (and tax year). The following limits are for 2021.


Mid-Year Changes in Eligibility

If you are HSA qualified all year long and have an open account, the contribution limits are pretty straightforward.

Becoming Eligible Mid-Year

Becoming eligible for an HSA mid-year is a common occurrence. It may happen if your employer changes insurance plans mid-year, or if you get a new job with a different insurance plan.

Remember, HSA eligibility always starts on the first of the month. Let’s say you got a new job with an individual HDHP and you meet all HSA eligibility requirements. You enroll in the plan on June 15, and you become HSA-eligible on July 1.

Let’s say you stay at the job all year and your insurance plan and eligibility don’t change. That means you are HSA-eligible for six months (July, August, September, October, November, and December).

Your contribution amount will be prorated.

Here's how this works out:

Individual Contribution Limit for 12 months = $3,600

$3,600 x 6/12 = $1,800

So your contribution limit for this year will be $1,800, because you became eligible on July 1.

Your maximum amount you can contribute for this year will be $1,800, because you became eligible for an HSA on July 1.

Another way to think of this is to break down the contribution limit from annually to monthly.

If the limit is $3,600 for the year, that is the same as contributing $300 every month.

$300 x 6 = $1,800

Of course, there are no contribution limits by month, but this can be an easy way to remember how to prorate your contribution limit. Don’t like manual math?

Losing Eligibility Mid-Year

The same prorating happens if you stop being HSA-eligible mid-year. This happens often for people enrolled in medicare coverage.

Here's a real-life example:

Let’s say you start the year with an HSA, then lose your eligibility on September 15. You were HSA-eligible for nine months of the year, including September, as you were eligible on the first day of September.

Here’s how the math looks for an individual over the age of 55:

$3,600 x 9/12 = $2,700

Plus, you can make a $1,000 annual HSA catchup. Prorated, that is:

$1,000 x 9/12 = $750

Your total contribution limit would be $2,700 + $750 = $3,450

Temporarily Losing Eligibility

There are a few things you could do that may make you temporarily ineligible for an HSA. This includes receiving medical benefits from a Veteran’s Affairs or an Indian Health Services facility. You are not eligible to contribute to an HSA if you received medical benefits from one of these entities in the preceding three months.

For example, let’s say you had an injury and received treatment at a VA hospital on June 5. You cannot contribute to your HSA for the months of July, August, and September.

But you can contribute for June, as you were eligible on the first of the month. So that means that for an individual, you can only contribute $2,700 for the year, instead of $3,600.

The Last Month Rule

There’s an important caveat to the info above — the Last Month Rule (also called the “full contribution rule”). The last month rule says if you are HSA-eligible on December 1, then you can choose to contribute the full amount for the year, even if you weren’t eligible for the whole year.

The catch? There is a testing period of twelve months. This means you must stay eligible through the end of the next year, or else you will face taxes and penalties.

For example, let’s look at the individual above who became HSA-eligible on December 1. They choose to contribute the full $3,600 for the year. They must continue to be eligible all the way through December 31, 2021. If they don't, their excess contributions will be taxable and subject to a 10% penalty.

The last month rule presents an opportunity for you to weigh the risks and rewards of making a full contribution. If you foresee no change to your job or eligibility status, and you want to build up your HSA savings, then it may be the right thing for you to do. But if you are planning on changing your job or changing your coverage, then it may not be the right move.

Mid-Year Changes in Coverage Type

A prorated contribution limit also applies if the type of coverage you have changes. This happens if you switch from an individual to a family insurance plan or vice versa.

Switch from Individual to Family Coverage

Let’s say you start the year with individual coverage, then you get married. You switch to family HDHP coverage on May 15. This means you spent the first five months of the year eligible for individual contribution limits and the rest of the year eligible for family contribution limits.

Here’s how the math breaks down:

$3,600 x 5/12 = $1,500

$7,200 x 7/12 = $4,200

$1,500 + $4,200 = $5,700 total contribution limit for the year

The last month rule does apply to this situation. So if you feel confident you will remain HSA-eligible with a family plan through the last day of the next year, then you may want to contribute the full $7,200 for the year.

Switch from Family to Individual Coverage

Let’s say you switch from family coverage to individual coverage starting May 15. That means you spent five months with family coverage and seven months with individual coverage.

Here’s the math:

$7,200 x 5/12 = $3,000

$3,600 x 7/12 = $2,100

$3,000 + $2,100 = $5,100 total contribution limit for the year

Staying on Top of Contributions Now Can Prevent Headaches Later

The most important thing to remember about contributions to your HSA is to stay informed and proactive. It's easy! Calculate exactly how much you want to contribute for the year and know when you want to make those contributions.

Many choose to contribute automatically with every payroll. Others choose to do it all in one lump sum at the end of the year. Some choose to max out their HSA. Others choose to contribute a lower amount to focus one other financial goals.

Whatever you do, staying informed of your choices and proactive about your decisions is always a wise move.

Disclaimer: the content presented in this article are for informational purposes only, and is not, and must not be considered tax, investment, legal, accounting or financial planning advice, nor a recommendation as to a specific course of action. Investors should consult all available information, including fund prospectuses, and consult with appropriate tax, investment, accounting, legal, and accounting professionals, as appropriate, before making any investment or utilizing any financial planning strategy.

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