How To Make a Full HSA Contribution If You Sign Up Mid-Year
If you gain HSA eligibility and open an HSA mid-year, you might think your only contribution option that year is to prorate the 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, even though you were only HSA-eligible for one month.
However, if you use the last-month rule to make a full contribution, you must remain 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, 2018 and had family coverage, you could use the last-month rule to contribute a full $6,900 to your HSA. However, if you lost eligibility before the end of 2019, 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 ($6,900) by 12 to find the monthly contribution limit ($575). 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 $575 x 1 = $575).
Now, subtract that number from the contribution limit ($6,900 – $575 = $6,325). You’ll need to include that $6,325 as taxable income in 2019 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.