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

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You have a high deductible health plan (HDHP) and a health savings account (HSA). Now you want to follow the IRS rules to make a mid-year change. This blog post will help.

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You have a high deductible health plan (HDHP) and a health savings account (HSA).

Now you want to follow the IRS rules to make a mid-year change.

This blog post will help. It covers both family coverage and individual coverage (also known as self-only coverage), how a status change impacts your HSA contribution limit, and more.


Are you an HSA eligible individual or family?

This post assumes that you are HSA-eligible and further that you already have an HSA account. If you don’t yet have an HSA account and want to learn more, here’s all that you need to know about eligibility:

You need an HSA-eligible health plan – like a high deductible health plan.

That’s right. HSA eligibility is defined by the single requirement of having an HSA-eligible health plan.

Based on 2020 IRS specifications, qualifying HSA health plans must have minimum deductibles of $1,400 for individuals and $2,800 for families. In addition, qualifying plans must have maximum out-of-pocket amounts of less than $6,900 for individuals and $13,800 for families.

Hey there! Hope you’re finding this post super helpful. Are you thinking about getting a tax-advantaged HSA to help keep your health care costs low? But first, you want to learn more? You’re in luck. We wrote the 2019 HSA Guidebook →

Annual HSA contribution limits for 2020 are $3,550 for individual coverage and $7,100 for family coverage, plus any applicable catch-up contributions. If you have a mid-year change – like moving from self-only coverage to family coverage, or vice versa, then your annual contribution limit changes.

Is Medicare an HSA-qualified plan?
No. Sorry. HSA contributions are not compatible with Medicare enrollment.

If you’re on Medicare, then you are not on an HSA-eligible health plan. You can’t contribute to an HSA, but can continue to use your HSA (for all qualified medical expenses). If you have already contributed the yearly maximum, but then enrolled in Medicare, you could incur tax penalties.

And be on the look out for “retroactive” Medicare coverage. If you are retroactively covered, this can also negate your ability to contribute for that retroactive time period.

How a Change of Status Affects Annual HSA Contribution Limits

What happens when you experience a mid-plan-year change in status from family coverage to individual coverage and vice versa?

Let’s run through two examples.

Move from Family to Individual Coverage

You have family HDHP coverage. So you can contribute a maximum of $7,100 to your HSA in 2020. But then in July, you have a mid-year status change. You switch to self-only coverage. Self-only coverage allows you to contribute a maximum of $3,550 to your HSA in 2020.

From January to June (6 months), you were eligible to contribute towards the family limit. As such, you would take 6/12, with 12 being the total number of months in the year, and multiply it by the family annual limit of $7,100. The result is $3,550. Then because from July – December you are covered under self-only coverage, you would multiply 6/12 by $3,550. The result is $1,750.

The result is a total contribution of $5,300 for the entire year.

Move from Individual Coverage to Family

You have individual coverage. You can contribute a maximum of $3,550 to your HSA in 2020.
But then on September 1, you have a mid-year status change. You switch to family coverage. And the 2020 annual contribution limit for family coverage is $7,100.

Similar to the previous example, when we do the math, here is how it translates:

  • 8/12 * $3,550 = $2,366
  • Plus 4/12 * $7,100 = $2,366

The result is a total contribution amount of $4,732 for the entire year.

Make a Full Year Contribution if Covered on December 1st

Under the IRS “full-contribution rule,” if you become HSA eligible by December 1, it is possible to contribute up to the maximum annual limit for that year, even if you are not eligible for the entire year.

It’s important to note that if contributions were made to an HSA under the “full-contribution rule,” you must remain eligible during the “testing period”—from the last month of the tax year until the end of the next calendar year.

In other words, you need to maintain eligible coverage through December 31st of the following year you qualify for the Last Month “December” rule.

Here’s an example:

If you switch to a new job on September 1, 2020 and continue that coverage so that on December 1, 2020 you are HSA-eligible, you can make the full year 2020 contribution ($3,550 for individuals / $7,100 for families, plus any applicable catch-up contribution) so long as you maintain eligible coverage through December 31, 2021.

This means if you change jobs (and therefore health plans), enroll in Medicare or simply select a new health plan during open enrollment next year that is not HSA-eligible, you will incur tax penalties due to excess contribution into the previous year’s HSA account.

The last month “December” rule is a bit of a gamble, as HSA-eligibility can be out of your control and based on external factors, like employment. Seek legal advice from a tax or financial professional if you are considering maxing out your yearly HSA contributions with the last month “December” rule.

Prorate your HSA Contribution

The most straightforward way to understand HSA contribution limits for mid-year changes is to contribute based on a pro-rated calendar schedule.

HSA eligibility is determined on the 1st of every month.

So if your HSA-eligible health plan starts on January 15th, you can begin contributions to your HSA on February 1st.

As such, your HSA (individual or family) would be prorated to 11 months (out of 12) for that calendar year. However, if your health plan started on the 1st of any month, you would not have to wait until the next month to begin contributing. You can start right away as you would be eligible for that month.

If you (or your spouse) is no longer HSA-eligible for an HSA plan, you can prorate your HSA contribution based on the last month you were HSA-eligible. If you switch or end coverage of your HSA-eligible health plan on October 15th, you would still able to count October as a full HSA-eligible contribution month. So for that calendar year, you would be prorated to 10 months (out of 12) for that calendar year.

Additionally, any pro-rated amount also applies to any catch-up contributions that may be applicable.

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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.