HSA-Eligible Health Plan Required
HSA eligibility is still defined by the single requirement of having an HSA-eligible health plan, like a high deductible health plan (HDHP). Based on 2018 IRS specifications, qualifying HSA health plans must have minimum deductibles of $1,350 for individuals and $2,700 for families. In addition, qualifying plans must have maximum out-of-pocket amounts of less than $6,650 for individuals and $13,300 for families.
As you already may know, 2018 HSA contribution limits are $3,450 for individuals and $6,900 for families.
On top of the contribution amounts noted above, catch up contributions for individuals 55 years of age or older of $1,000 per year are allowed. The full amount of $1,000 is allowed no matter when you turn 55 years of age in that calendar year. The same is true of your spouse if you have a family HSA plan (although you will need to create a separate HSA for your spouse to take advantage of his/her own catch-up contribution amount).
The HSA-eligible health plan requirement defines if you (and/or your spouse) can contribute to an HSA. If you have an HSA-eligible health plan, you can contribute to an individual HSA. If you and your spouse have an HSA-eligible health plan you can contribute to a family HSA.
If any of those requirements change, you (or our spouse) will no longer be eligible to contribute. If you have already contributed the yearly maximum you could incur tax penalties. We will outline the full details of those nuances below.
HSA-Eligibility: Contributions not Spending
HSA-eligibility enables HSA contributions, not HSA spending (or investing of existing dollars). Once you have contributed to your HSA, you can continue to use your HSA dollars for years to come for any qualified out-of-pocket medical expenses. You can also use these funds on any tax dependent, whether or not they are covered under your health plan.
However, all HSA eligibility and contribution requirements are negated by Medicare enrollment. HSA contributions are not compatible with Medicare enrollment. You (or your spouse) are effectively no longer on an HSA-eligible health plan so can no longer contribute to an HSA. You may continue to use your HSA (for all qualified out-of-pocket medical expenses), but may no longer contribute. If you have already contributed the yearly maximum, but then enrolled in Medicare, you could incur tax penalties. Again, we will outline the full details of those nuances below. 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.
Last Month “December” Rule
Before we dive into pro-rating HSA contributions, based on HSA-eligible health plan start date or termination dates, there is on overriding HSA contribution rule, aka the Last Month or “December” rule. Any person with an HSA can make a full year contribution if he/she is covered on an HSA-eligible health plan on December 1st AND maintains eligible coverage through December 31st of the following year. Let use an example. If you switch to a new job on September 1, 2017 and continue that coverage so that on December 1, 2017 you are HSA-eligible, you can make the full year 2017 contribution ($3,400 for individuals / $6,750 for families) so long as you maintain eligible coverage through December 31, 2018.
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 over contributing 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, so consult a tax or financial professional if you are considering maxing out your yearly HSA contributions with the last month “December” rule requirement.
Pro-Rated Contributions Limits
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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