Making Sense of the HSA Testing Period
The testing period is a 13-month period where you must keep HSA eligibility or face a tax penalty. It comes into play in these three scenarios:
- When you use the last-month rule to make a full year’s contribution even though you opened your HSA mid-year
- When you transfer your IRA or Roth IRA to your HSA
- When you transfer your FSA or HRA to your HSA
What 13 months make up the testing period?
- • For the first scenario, the testing period is the 13-month period starting on Dec. 1 of the year the HSA was opened and ending on Dec. 31 of the next year.
- • For the second and third scenarios, the testing period is the 13-month period starting on the first day of the month when the transfer happened and ending on the last day of the following 12th month (if you made a transfer in June, the testing period would be until the end of the following June).
What happens if you lose HSA eligibility during the testing period?
- • For the first scenario, if you lose HSA-eligibility during the testing period, you’ll have to include the portion of your contribution that was only possible through the last-month rule as taxable income (see an example here).
- • For the second and third scenarios, you have to include the transfer amount as taxable income. In each case, you have to pay an additional 10% penalty on either ineligible funds.
Unlike a normal excess contribution, you do not have to remove the contributions from your accounts or pay the 6% excise tax on the funds.
Are there any exceptions to this rule?
For the first and second scenario, the testing period rules don’t apply if you lose HSA eligibility due to death or disability.