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How To Make a Full HSA Contribution If You Sign Up Mid-Year

If you gain HSA eligibility mid-year, you might think your only contribution option that year is to prorate the HSA annual contribution limit by how many months you were eligible. However, you’re also allowed to make a full annual HSA contribution by taking advantage of the last-month rule.

The last-month rule means that if you are an HSA-eligible individual on the first day of the last month of your tax year (December 1 for most taxpayers), you are considered an eligible individual for the entire year. This means that if you became HSA-eligible on December 1, you could contribute up to that year’s annual contribution limit.

However, if you use the last-month rule to make a full contribution, you must remain HSA-eligible during that month, as well as the following 12 months. So if you became HSA-eligible on Dec. 1 and made a full contribution, you would need to remain HSA-eligible until Dec. 31 of the following year (that time frame is called a testing period). If you lose HSA-eligibility during the testing period (for reasons other than death or becoming disabled) you’ll have to include the contribution amount that was only possible through the last-month rule as taxable income. You’ll also have to pay an additional 10% penalty on that contribution amount.

Here’s an example: if you became HSA-eligible on December 1, 2021 and had family coverage, you could use the last-month rule to contribute a full $7,200 to your HSA (plus an extra $1,000 if you’re 55 or older). However, if you lost eligibility before the end of 2022, you’ll need to calculate the amount of income that only was possible through the last-month rule (see the next paragraph).

Here’s how to do this: Divide your contribution limit ($7,200) by 12 to find the monthly contribution limit ($600). You’d add your catch-up contribution to your contribution limit if you made one. Then, multiply that number by the number of months in the year you were HSA-eligible (in the example above, there was only 1 (December’s) month of eligibility, so $600 x 1 = $600).

Now, subtract that number from the contribution limit ($7,200 – $600 = $6,600). You’ll need to include that $6,600 as taxable income in the year you lost HSA eligibility and pay a 10% additional tax on it.

If you’re confident you’ll be HSA-eligible for the next year, the last-month rule is a great way to squeeze more dollars into your account, where you can use them to pay for current medical expenses or invest them for long-term growth.

Don’t have an HSA? Sign up for one here.