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?
The testing period rules don’t apply if you lose HSA eligibility due to death or disability.