Contribution Rules for Gaining or Losing HSA Eligibility Mid-Year
If you gain or lose HSA eligibility during the year, there are specific requirements you’ll need to follow to avoid paying penalties. Here’s what you need to know:
Contribution Rules When Losing HSA Eligibility Mid-Year:
Remember, HSAs operate by tax year, not calendar year. If you lose HSA eligibility in the middle of the year, you’ll need to prorate your contributions by the number of months you were eligible. For example, if you started the year HSA-eligible but lost eligibility on August 1st, you’ll need to take your maximum contribution limit ($3,450 for self-only coverage and $6,900 for family coverage in 2018), multiply it by the number of months you were eligible, then divide by 12.
For the scenario above, the prorated contribution limit for self-only coverage would be $2,012.50 ($3,450 x 7 months of eligibility / 12). If you are 55 or older, you would also prorate your annual $1,000 catch-up contribution based on the months you were HSA-eligible.
If you don’t prorate your contributions, you’ll need to remove the excess contributions (and any earnings tracked to your contributions) from your account before you pay that year’s income taxes. Otherwise, you’ll have to pay a penalty.
Contribution Rules When Gaining HSA Eligibility Mid-Year:
If you become HSA-eligible mid-year (and open an HSA) and are HSA-eligible as of December 1st, you have two options for how much to contribute:
First, you can prorate your contribution. To do this, multiply your single or family contribution limit by the number of months you were HSA-eligible. That number is your prorated contribution limit for that year.
Secondly, you can use the “last-month rule” to make a full contribution, provided you stay HSA-eligible through the end of the following calendar year. If you lose eligibility before the end of the next calendar year, though, you’ll have to include any contribution above the prorated amount (the first option above) as taxable income and pay a 10% penalty on it. However, you don’t have to remove the excess contribution like you would with a regular excess contribution.
Here’s an example: You became eligible on May 1st, 2018 and contributed the full self-only contribution limit for 2018 ($3,450). However, you then lose HSA-eligibility in 2019. You’d need to calculate your prorated contribution limit ($3,450 x 8 months of eligibility / 12 months = $2,300) and subtract that from the total contribution limit ($3,450 – $2,300 = $1,150). Then, you’ll need to report that $1,150 as taxable income for 2019 and pay a $115 penalty on it ($115 is 10% of $1,150).