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Why You Should Make HSA Contributions For 2019 (Even in 2020)
Like an IRA, you may have heard that you can still make contributions toward your HSA for the 2019 tax year, even in 2020. But why worry about 2019 now that you can make contributions toward 2020? We’re breaking down how it works, why it matters, and how to do it.
Health savings accounts (HSAs) are regulated by the IRS. All HSAs, regardless of HSA provider, follow certain rules — like annual contribution limits and contribution deadlines.
Contribution limits change for each calendar year and have historically increased gradually from year to year. How much you can contribute is based on your health insurance coverage. For 2020, individuals with self-only health insurance coverage can contribute up to $3,550 and individuals with family health insurance coverage can contribute up to $7,100. (For 2019, contribution limits were $3,500/self-only and $7,000/family.) Self-only coverage means that you’re the only person covered under your plan. Family coverage includes you plus one or multiple dependents (e.g. you and a spouse, you and a child, you and a spouse and child/children).
Contribution deadlines, however, are based on tax year. That means HSA owners have from January 1, 2019 – April 15, 2020 to make contributions toward tax year 2019. (The specific date is set by the IRS each year but is always in mid-April.)
So, why contribute toward 2019 instead of starting on contributions for 2020?
This especially benefits individuals who were HSA eligible in 2019 but are no longer eligible in 2020. For example, maybe you changed health insurance plans or went on your spouse’s non-HSA-eligible health insurance starting in January. Or, perhaps you’re still HSA-eligible, but switched from family coverage to self-only coverage for 2020, and therefore can now only contribute half as much as 2019.
If any of these situations apply to you, you can still make contributions toward 2019 based on your eligibility for 2019. So, if you were eligible for the full 12 months of 2019, but only contributed half of the contribution limit, you can now go back and contribute the other half, even if you’re no longer HSA-eligible. Similarly, if you’re still HSA-eligible, had family coverage in 2019, but now have self-only coverage in 2020, you can max out your 2019 family contribution ($7,000), before you’re limited to the $3,550 self-only limit for 2020. Just remember, your HSA contribution limit is pro-rated based on your eligibility throughout the year. If you’re HSA-eligible for 6 months in the year, you would divide your applicable 2019 contribution limit by 12, then multiply by 6 to find your prorated contribution limit.
Add Time and Save Money
Put simply, being able to contribute to the prior year gives you more time to maximize your HSA. Maybe you got a bonus in December or some Christmas money you can use to boost your 2019 contributions. It might not be the most exciting way to spend your Christmas check from Aunt Susie, but we don’t think you’ll regret it. If you’re looking at your HSA as a tool in your comprehensive retirement strategy (which we strongly recommend!), time is your biggest strength. Even the smallest addition can make a world of difference in 10, 20, or even 30 years from now.
Plus, one of the biggest perks of an HSA is its triple tax benefit — contributions are tax-free, withdrawals are tax-free, and interest grows tax-free — making it the most tax-advantaged savings account on the market. By contributing toward a prior tax year, you can maximize the tax benefit for 2019.
For HealthSavings accountholders, it’s easy to contribute toward 2019. Here’s how:
And employers! We haven’t forgotten about you. Here’s how to make a 2019 contribution to your employees:
If you have additional questions, check out all the details around HSA contributions or give us a call at (888) 354-0697.
Catch-Up Contribution FAQs and Answers
If you are age 55 and older, you are allowed to contribute up to an extra $1,000 each year to your health savings account as a catch-up contribution. This increases your 2020 contribution limit from $3,550 to $4,550 (if you’re covered by individual health insurance) or from $7,100 to $8,100 (if you’re covered by couples or family health insurance).
If you’re looking to take advantage of catch-up contributions, see the FAQs below for everything you need to know.
Can both spouses make catch-up contributions?
Yes, both spouses can make catch-up contributions provided that they both 1) are 55 or older, 2) are eligible for health savings accounts, and 3) have established their own separate health savings accounts. For 2020, the total health savings accounts contribution limit for two eligible spouses who are each 55 or older with separate accounts and covered by couples or family insurance is $9,100 ($7,100 + $1,000 + $1,000).
Can one spouse make a catch-up contribution into the other spouse’s health savings account?
No, you cannot make a catch-up contribution into anyone else’s health savings account. You can only make a catch-up contribution into your own health savings account.
If I don’t turn 55 until the end of the year, do I need to prorate that year’s catch-up contribution?
No, you don’t. If you are an eligible individual who is age 55 or older at the end of a particular year, you are permitted to make up to a $1,000 catch-up contribution that year. Your contribution doesn’t need to be prorated based on what month you turned 55.
If I lose health savings account eligibility during the year, do I have to prorate my catch-up contribution?
Yes. If you do not remain eligible that entire year, you must prorate your catch-up contribution based on the number of months you were eligible. For example, if you were health savings account-eligible at the beginning of the year and lost eligibility in August, you can make a catch-up contribution of up to $666.67 (8/12 x $1,000), since you were eligible 8 months out of the year.
If you remain an eligible individual the entire year you turned 55, you do not need to prorate your catch-up contribution.
Can I make a catch-up contribution when I’m on Medicare?
No, you cannot. Once you enroll in Medicare, you lose health savings account eligibility, which means you cannot make catch-up contributions any more. However, there is a movement in Congress to allow Medicare recipients to keep funding and using their health savings accounts. Contact your representative in Congress if you want to support this measure.
If I am eligible for Medicare but not enrolled, can I still make a catch-up contribution?
Yes, as long as you are otherwise health savings account-eligible and have a health savings account, you can make catch-up contributions.
Does my catch-up contribution change if I go from individual health insurance coverage to couples or family coverage during the year, or vice-versa?
No, the catch-up contribution limit is always $1,000, regardless of the type of health insurance coverage you have.
If you’re investing your health savings account funds as a way to pay for future medical expenses, catch-up contributions are a wonderful way to squeeze every dollar into your account. If you’re not using your health savings account as an investment vehicle, you’re missing out on unparalleled tax savings; learn more here.
How Much Can You Contribute To Your HSA If Your Health Coverage Changes?
The more you contribute to your HSA, the more funds you have available to pay for current qualified medical expenses tax-free or invest for retirement medical costs. However, if you change health coverage during the year, it can be tricky trying to figure out how much you can put in your HSA without making an excess contribution. Here are a few examples of how to navigate HSA contributions amid changing health coverage:
Remember, the IRS sets specific rules defining HSA-qualified health insurance; many plans do not qualify, even if they have high deductibles. If you change health coverage to a plan that isn’t HSA-qualified, you must prorate your contribution by how many months you were eligible in your tax year. If you were 55 or older and made a $1,000 catch-up contribution while you were eligible, you must prorate that too.
Say your tax year starts January 1st, and you were HSA-eligible at the beginning of a year but moved to an ineligible plan in the middle of August. You keep your HSA eligibility until the end of the month, so you were eligible for 8 out of 12 months in the year. Now, multiply that ratio (8/12) by your applicable annual contribution limit to find your prorated contribution limit.
Your contribution limit depends on whether your HSA-eligible health coverage was self-only or family (self-only coverage just covers you, while family coverage also covers at least one other person). For 2020, the self-only contribution limit is $3,550, and the family contribution limit is $7,100. If your coverage was self-only, you’d multiply $3,550 by 8/12 for a prorated contribution limit of $2,366.66.
If you switch to a HSA-qualified high deductible health plan (HDHP) mid-year and are HSA-eligible as of December 1st, you have two options for how much you can contribute:
First, you can prorate your contribution. To do this, multiply your self-only or family contribution limit by the number of months you were HSA-eligible, then divide by 12. That number is your prorated contribution limit for that year. For instance, if you had self-only coverage and were HSA-eligible as of November 1st, your prorated contribution limit would be $591.66 ($3,550 x 2 months eligible / 12).
Second, you can use the “last-month rule” to contribute up to the maximum contribution limit, even though you weren’t eligible for 12 months. This option allows you to contribute more, but you must stay HSA-eligible through the end of the next calendar year or face a tax penalty. Learn more about the last-month rule here.
If you were HSA-eligible all year and had family HDHP coverage as of December 1 (or the first day of the last month of your tax year), your contribution limit is that year’s family contribution limit. In 2020, the family contribution limit is $7,100. This is true even though you switched from self-only to family coverage during the year.
If you were HSA-eligible all year but switched from family to self-only HDHP coverage mid-year, you must calculate your contribution limit. Here’s how:
If you had family coverage through August 31 (first 8 months of the year), then switched to self-only coverage for the last 4 months of the year, you’d multiply that year’s family contribution limit by 8, then divide by 12 (for 2020, $7,100 x 8 / 12 = $4,733.33). Then, you’d multiply that year’s self-only contribution limit by 4, then divide by 12 (for 2020, $3,550 x 4 / 12 = $1,183.33).
Finally, you’d add those two numbers together to get your contribution limit ($4,733.33 + $1,183.33 = $5,916.67).
In this scenario, you and your spouse together cannot contribute more than the current family maximum contribution limit. This applies whether you and your spouse each have family coverage or each have self-only coverage. However, you don’t have to split your contributions equally; one spouse can contribute more than the other.
By always knowing how much you’re allowed to contribute to your HSA, you can avoid excess contributions while maximizing the funds in your account. Want to learn more about HSAs? Get our Ultimate HSA Guide and become an HSA expert.
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, 2020 and had family coverage, you could use the last-month rule to contribute a full $7,100 to your HSA (plus an extra $1,000 if you’re 55 or older). However, if you lost eligibility before the end of 2021, 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 ($7,100) by 12 to find the monthly contribution limit ($591.66). 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 $591.66 x 1 = $591.66).
Now, subtract that number from the contribution limit ($7,100 – $591.66 = $6,508.33). You’ll need to include that $6,508.33 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.
How To Remove An Excess HSA Contribution
If you contribute too much to your HSA, you could have to pay a tax penalty if you don’t act promptly. Here’s what to do if you ever make an excess HSA contribution.
The IRS sets contribution limits for HSAs each year: one for accountholders under self-only health coverage and the other for accountholders under family coverage. In 2020, you can contribute up to $3,550 under self-only coverage and $7,100 under family coverage. If you are 55 or over, you can contribute an additional $1,000 annually as a “catch-up contribution.”
These contribution limits include contributions to your account from all sources, including your employer. If you contribute more than your applicable limit, you have three options:
If you choose this option, you don’t have to pay any tax penalty on your excess contribution.
For this option, you just have to stay HSA-eligible long enough the following year to absorb the previous year’s excess contribution (you need to be able to contribute at least as much to your HSA as the previous year’s excess contribution).
For example, if you made an excess contribution of $1,000 in 2019 and had family coverage, you would need to stay HSA-eligible through February 2020 to absorb that excess contribution. Here’s how to find this: Divide your 2020 contribution limit by 12 to find your monthly contribution limit ($7,100 / 12 = $591.66). Then, divide your excess contribution by the monthly contribution limit and round up to the nearest whole number to see how many months you need to stay eligible for ($1,000 / $591.66 = 1.69, which rounds up to 2).
This is the most complicated and costly option.
Remember, transfers or rollovers of one HSA into another don’t count against your contribution limit. Learn more about HSA transfers and rollovers.
For HealthSavings accountholders: To remove an excess contribution you made to your HSA, fill out this form and mail or fax it to the address on the form. To remove an excess contribution your employer made to your HSA, fill out this form and mail or fax it to the listed address.