Determine your Contribution Limit when “My Insurance Changed Last Year” – Line 3 on Form 8889

“I have a complicated situation, what is my HSA contribution limit for the year?”

I get this question quite a bit from readers, and it is a great question. At some point during the prior year, your plan / coverage / eligibility changed (possibly multiple times), and all the IRS says regarding the contribution limit is “$3,xxx for Single, $6,xxx for Family”. Not a lot of detail there. However, being good indentured servants taxpayers, we want to fill out our taxes correctly and avoid an audit, so let’s discuss how to determine your Health Savings Account contribution limit when you had insurance changes throughout the year.

The situations manifest themselves in a variety of ways:

  1. I began HSA eligible coverage this year, what is my contribution limit?
  2. I ended HSA eligible coverage this year, what is my contribution limit?
  3. I had gaps in my HSA eligible coverage this year, what is my contribution limit?
  4. My health insurance changed throughout the year, from single to family, what is my HSA contribution limit?

Spoiler Alert: You will see that situation #1 can employ the Last Month Rule / Testing Period, while the other 3 use a weighted average by month to determine total contribution limit. Read on.

#1: I began HSA eligible coverage this year, what is my contribution limit?

We know that there are single/family contribution limits for an HSA (2016: $3350/$6750), but what happens if you begin new HSA eligible insurance mid year? Do you get a partial contribution limit, a full contribution limit, or how do you calculate it? Well, the Last Month Rule, a part of the IRS tax guidelines, governs this. It basically says:

If you are covered by an HDHP on Dec 1st of a given year, you may contribute the maximum for that year.

However, there is a catch. In order for you not to take advantage of the system, if you take advantage of the Last Month Rule you are subject to the Testing Period. The Testing Period states:

If you contribute per the Last Month Rule and end your HDHP insurance within 1 year, you will have to pay tax on any excess contributions you were allowed to make and pay a 10% penalty.

Thus, you want to be very certain that you plan on maintaining HSA coverage for 1 full year if you take full advantage of the Last Month Rule. Otherwise, you will fail the Testing Period when you file next year’s taxes and the government, assuming you are taking advantage of the system, will penalize you for excess contributions (on a pro rata scale based on time you lost coverage). You can always choose to hedge your bet and contribute a fraction, say 50%, which would entail a 6 month Testing Period.


#2: I ended HSA eligible coverage this year, what is my contribution limit?

If you changed insurance or otherwise ended your HSA eligible insurance during the year, you can still contribute to your HSA for those months that you had HSA coverage. For example, if you had a family HSA and had coverage for 6 months, your contribution limit for 2016 would be $6,750 x 6/12 = $3,375. This means that you still reap the benefits of the HSA contribution, even though you have left the plan. In the prior example, if you had HSA insurance from January 1st – July 30th 2015 (6 months), you have up until tax day of the following year to contribute to your HSA. In this case, April 15th, 2016.

This contribution limit is verified by looking at the details of how Line 3 Limitation Chart and Worksheet determines your contribution limit on your HSA tax form, Form 8889:

This part determines your monthly contribution limit for 2015
HSA Form 8889 IRS Line 3 Limitation Chart 1
The second part performs the monthly average, summing and then dividing by 12
HSA Form 8889 IRS Line 3 Limitation Chart 2

Based on the above chart, you can see how any combination of insurance timing and coverage can lead to your yearly contribution limit.


#3: I had gaps in my HSA eligible coverage this year, what is my contribution limit?

No problem. Looking above at the Line 3 Limitation Chart Worksheet, just fill out your yearly contribution limit for those months you did have coverage. Other months when you didn’t have HSA coverage (say through a job, COBRA, other plan, etc.) can have a big fat 0. The zeroes don’t cause a problem, they just don’t add to your contribution limit for the year. For example, your data might look like this:

  • January – $3,350
  • February – $0
  • March – $0
  • April – $3,350
  • (etc.)

Just add them up, and divide by 12 to get your contribution limit.


#4: My health insurance changed throughout the year, from single to family, what is my HSA contribution limit?

Perhaps sometime during the year, your spouse was added onto your plan. You previously qualified for single ($3,350) coverage, but with the addition of your spouse (or kids) you qualified for family ($6,750) coverage. Then your spouse / kids left the plan. A few months of Family contribution limit, and then back to single.

No problem, just plug those numbers into the chart:

  • January – $3,350 <-single
  • February – $6,750 <-family
  • March – $6,750 <-family
  • April – $6,750 <-family
  • May – $6,750 <-single
  • (etc.)

    • Whatever your combination is, just plug the yearly contribution limit into the month, and then divide by 12.

    ————————————

    Note: if you have an HSA, please consider using my free service TrackHSA.com to manage your Health Savings Account. You can store purchases, receipts, and reimbursements securely online for free.

    TrackHSA logo

    TrackHSA.com – manage your HSA purchases, receipts, and reimbursements online for free

    After being unhappy with my combination shoebox / Excel file HSA tracking system, I designed and created TrackHSA.com to better manage my Health Savings Account. TrackHSA is the first website that allows anyone to track their HSA account activity securely online for free.

    TrackHSA record keeping

    HSA Account Summary

    HSA’s have a lot of moving parts including funding, taxation, purchases, reimbursements, and government required record keeping. Most HSA custodians (banks) track the in’s and out’s of your actual bank account, but there is little qualitative information about what those transactions were for and how they were justified. The government requires this sort of information for tax filing and it was a pain to maintain. TrackHSA solves this by creating a log of all your HSA eligible purchases, their details, whether or not they have been reimbursed, and allows you to attach a receipt to justify the expense.


    HSA receipt image glasses

    It started based on my personal aggravations with my HSA:

    • keeping receipts in a shoe box
    • manually maintaining purchase history in Excel on one computer
    • not knowing how much I could withdraw from my HSA account to reimburse credit card purchases
    • incomplete information when tax time rolled around

    TrackHSA addresses this by:

    • uploading a receipt to each purchase, storing it safely in the cloud
    • maintaining a purchase history securely online, accessible from anywhere
    • calculating your reimbursable amount based on all prior transactions
    • suggests additional detail for each purchase to help with IRS Form 8889


    health_savings_account_storage

    Hopefully you find it useful, the site is free and the data is stored securely and anonymously on Google’s servers.

    Please contact me at Evan@HSAedge.com if you have any questions. If you know someone who would benefit from this free service, please share it with them.

    How tax is deducted from manual HSA contributions

    This question was submitted by HSA reader Adam. Send yours in to evan@hsaedge.com

    I got a family HDHP medical plan from my employer in July of 2015. Currently, my contribution is directly cut from paycheck and funded to my HSA. At the end of the calendar year 2015, if I am still below the limit for the year, can I contribute the remaining by an ACH bank transfer as long as it is before April 15, 2016? Will the additonal amount be treated as tax deductible? How do I report this additional contribution on the HSA form?

    Yes, what you are suggesting is a valid path for funding your account. You are just combining the two methods of how the HSA tax deduction works:

    1. Each pay period, your HSA contribution is pre-tax so you avoid paying income tax on it.
    2. If you make an additional contribution, that will be done with after-tax dollars. When you file your taxes, the form will separate out employer vs individual HSA contributions. It will subtract your individual contributions from your taxable income, so you end up not paying taxes on that contribution, albeit later in the process.

    See the article about IRS Tax Form 8889 for how the form works. As you can see, there are two different sections for employer contributions and individual contributions.

    One thing to note about this strategy is that you may contribute > 50% of the Contribution Limit while you were insured for 50% of the year. This is legal per the Last Month Rule and Testing Period, and only becomes a problem if you change insurance (move to non-HSA) within the next year. That could then be classified as over contributing (because the IRS thinks you are “abusing” the system) and risk a penalty. See the full article about how the Last Month Rule and Testing Period work.