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
- HSA Contribution Limits
- Mid-Year Changes in Eligibility
- Mid-Year Changes in Coverage Type
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.
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) and are adjusted for inflation by the IRS each year.
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.
Another way to think of this is to break down the contribution limit from annually to monthly. 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? Use Lively's Contribution Calculator.
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.
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 you could only contribute for nine months, as opposed to the full twelve months.
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.
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.
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 amount for a family plan 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.