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How Much Can You Contribute To Your HSA If Your Health Coverage Changes?

How Much Can You Contribute To Your HSA If Your Health Coverage Changes?

 

The more you contribute to your HSA, the more funds you have available to pay for current qualified medical expenses tax-free or invest for retirement medical costs. However, if you change health coverage during the year, it can be tricky trying to figure out how much you can put in your HSA without making an excess contribution. Here are a few examples of how to navigate HSA contributions amid changing health coverage:

1. You move to health coverage that isn’t HSA-qualified mid-year and lose HSA eligibility

Remember, the IRS sets specific rules defining HSA-qualified health insurance; many plans do not qualify, even if they have high deductibles. If you change health coverage to a plan that isn’t HSA-qualified, you must prorate your contribution by how many months you were eligible in your tax year. If you were 55 or older and made a $1,000 catch-up contribution while you were eligible, you must prorate that too.

Say your tax year starts January 1st, and you were HSA-eligible at the beginning of a year but moved to an ineligible plan in the middle of August. You keep your HSA eligibility until the end of the month, so you were eligible for 8 out of 12 months in the year. Now, multiply that ratio (8/12) by your applicable annual contribution limit to find your prorated contribution limit.

Your contribution limit depends on whether your HSA-eligible health coverage was self-only or family (self-only coverage just covers you, while family coverage also covers at least one other person). For 2018, the self-only contribution limit is $3,450, and the family contribution limit is $6,900. If your coverage was self-only, you’d multiply $3,450 by 8/12 for a prorated contribution limit of $2,300.

2. You weren’t HSA-eligible previously but move to HSA-qualified health coverage mid-year and become eligible

If you switch to a HSA-qualified high deductible health plan (HDHP) mid-year and are HSA-eligible as of December 1st, you have two options for how much you can contribute:

First, you can prorate your contribution. To do this, multiply your self-only or family contribution limit by the number of months you were HSA-eligible, then divide by 12. That number is your prorated contribution limit for that year. For instance, if you had self-only coverage and were HSA-eligible as of November 1st, your prorated contribution limit would be $575 ($3,450 x 2 months eligible / 12).

Second, you can use the “last-month rule” to contribute up to the maximum contribution limit, even though you weren’t eligible for 12 months. This option allows you to contribute more, but you must stay HSA-eligible through the end of the next calendar year or face a tax penalty. Learn more about the last-month rule here.

3. You stayed HSA-eligible all year but moved from self-only to family coverage mid-year

If you were HSA-eligible all year and had family HDHP coverage as of December 1 (or the first day of the last month of your tax year), your contribution limit is that year’s family contribution limit. In 2018, the family contribution limit is $6,900. This is true even though you switched from self-only to family coverage during the year.

4. You stayed HSA-eligible all year but moved from family to self-only coverage mid-year

If you were HSA-eligible all year but switched from family to self-only HDHP coverage mid-year, you must calculate your contribution limit. Here’s how:

If you had family coverage through August 31 (first 8 months of the year), then switched to self-only coverage for the last 4 months of the year, you’d multiply that year’s family contribution limit by 8, then divide by 12 (for 2018, $6,900 x 8 / 12 = $4,600). Then, you’d multiply that year’s self-only contribution limit by 4, then divide by 12 (for 2018, $3,450 x 4 / 12 = $1,150).

Finally, you’d add those two numbers together to get your contribution limit ($4,600 + $1,150 = $5,750).

5. You and your spouse are both HSA-eligible and each have health coverage that doesn’t cover each other

In this scenario, you and your spouse together cannot contribute more than the current family maximum contribution limit. This applies whether you and your spouse each have family coverage or each have self-only coverage. However, you don’t have to split your contributions equally; one spouse can contribute more than the other.

 

By always knowing how much you’re allowed to contribute to your HSA, you can avoid excess contributions while maximizing the funds in your account. Want to learn more about HSAs? Get our Ultimate HSA Guide and become an HSA expert.

Author: James Denison