Tag Archives: Change in Coverage

HSA Contribution Limit When Insurance Plan Changes

This question was sent in by HSA Edge reader Oscar. Feel free to email any questions you may have to evan@HSAedge.com

I switched jobs this year. My insurance changed from an HSA to another HSA plan with a different deductible. How does this affect my contribution limit?

Contribution Limit determined by monthly HSA eligibility

The answer to your question is “it depends”, so here is the way to determine this.

Your HSA eligibility is determined on the first day of each month. If you are an eligible individual on the 1st, you “earn” that month’s worth (e.g. 1/12) of the maximum contribution limit. At the end of the year, the sum total of these amounts is your contribution limit for the year.

Remember that an eligible individual is someone who is:

Covered by a HDHP on the first of the month
Has no other health coverage (including FSA’s)
Aren’t enrolled in Medicare
Can’t be claimed as a dependent on someone else’s tax return

IRS Form 969 confirms this:

HSA-what-is-an-eligible-individual

Note that the Last Month Rule can “override” the above logic and increase your contribution limit for the year, based on your eligibility on December 1st.

Calculating contribution limit

Assuming there was no gap in coverage on the first of any month, you will earn that month’s contribution limit as normal. If that means you are an eligible individual during each month of the year, you will earn 12/12 month’s credit and thus 100% of the full contribution limit for the year. This is the maximum contribution afforded to Health Savings Accounts.

On the other hand, if you had a gap in HSA coverage, you might have a reduced contribution limit. For example, if your original HSA coverage ended in August and your new coverage did not begin until October 1st, you would have missed September. That means you lose that 1/12 for September. Assuming you had coverage for the other months in the year, your contribution limit would equal 11/12 x (family/self only limit). Visually, it looks like this:

January – eligible
February – eligible
March – eligible
April – eligible
May – eligible
June – eligible
July – eligible
August – eligible
September – not eligible
October – eligible
November – eligible
December – eligible

For 2018, this equation would be 11/12 x $6,900 family limit = $6,325 for your contribution limit.

Note: If you want help calculating your HSA contribution and filing your taxes, please consider my service EasyForm8889.com. It asks you simple questions and fills out Form 8889 correctly for you in about 10 minutes.

When Can I Make My HSA Contribution?

A common question for HSA participants is, “I have HSA insurance this year, so when and how much can I contribute that to my HSA?”. The answer is actually more flexible than you think: you have myriad options of how much and when you contribute to your Health Savings Account. As you will see, the main rule is you need a Health Savings Account established with a bank / custodian to make the contribution. After that, you have flexibility to get your money into the account.

In general, you can make your full HSA contribution at anytime up until tax day of the following year.

Rule 1: You can contribute any amount up to your Contribution Limit

First, know that you can contribute any amount to your HSA as long as it does not exceed your contribution limit. You have complete flexibility in determining how much to contribute. This can be the maximum allowable, $50 per month, or whatever works for you. Remember: if you start coverage mid year, and are insured as of December 1st, you can use the Last Month Rule to contribute as if you were eligible for the entire year.

Rule 2: You can contribute at any time during the year

You need to open a Health Savings Account in order to make a contribution. Of course, you need to prove HSA eligible insurance to open that account, but after that, you can make contributions at any time. The timing can be weekly, monthly, full amount at once, any amount at any time, or even any amount in the subsequent year (see next section).

Rule 3: You can contribute in the following year

A great part of HSA’s is that you can make a contribution in the subsequent year as a prior year contribution. You have until the tax filing day for the year to make a contribution for the prior year. For example, for the 2019 tax year, you have until April 15th (or so) of 2020 to make an HSA contribution for 2019. Just be sure to flag the contribution for the prior year; otherwise, it will apply towards the current year.

Here are some various scenarios to demonstrate how flexible the timing of your Health Savings Account contribution can be:

Scenario 1: You have HSA coverage all year

If you have HSA eligible coverage for the entire year, then you know your contribution limit. From there, you can contribute that amount at any time in any amount during the year. Let’s say you have self-only coverage in 2019 (note that this would work the same for Family coverage, just different amounts). For 2019, your contribution limit is $3,500. Here are some options as to when you can make your contributions:

Contribute full amount of $3,500 on January 1st, 2019
Contribute 1/12th ($291.67) of full contribution limit each month
Contribute $500 each quarter for a total of $2,000
Contribute full amount of $3,500 on April 14th, 2020 as a prior year contribution

Scenario 2: Start HSA coverage mid year

If you begin coverage mid year, your contribution limit will be less than the maximum allowable. This is because HSA eligibility is determined at the start of each month. As a result, your contribution limit may be a fraction (or pro rata amount) of the maximum limit. For example, if your HSA insurance begins November 1st, your contribution equals 2/12 x your maximum contribution. The options for when you can contribute to the HSA are:

Contribute pro-rata amount (for months covered) any time after coverage begins
Contribute partial amount any time after coverage begins
Contribute maximum amount using Last Month Rule any time after coverage begins (see below)
Contribute full amount before tax day in subsequent year as a prior year contribution

Scenario 3: End HSA coverage during the year

Even if your HSA coverage ends, this does not prevent you from contributing to the HSA for that year. A common misconception is “I can’t contribute any longer because I don’t have HSA insurance”. This is because your contribution limit is a “yearly” amount that can be contributed at any time. Even if your coverage ends, you have still “earned” a contribution limit for the coverage you did have during the year.

You can still contribute to your HSA even after your HSA eligible insurance has ended during the year.

However, given that you will not have HSA eligible insurance for some months, your contribution limit will be less than the maximum contribution limit. Be sure not to over contribute or you will have excess contributions and face taxes and penalties.

If your HSA coverage ended, you have many options to contribute to your HSA:

Full amount before coverage ends
Full amount after coverage ends
Partial amount before coverage ends, partial amount after coverage ends
Full or partial amount in subsequent year as a prior year contribution

Scenario 4: contribute more using the Last Month Rule

The Last Month Rule allows you to contribute the maximum contribution limit during a year that you start coverage, as long as you have coverage on December 1st of that year. That means you can contribute more than you could have otherwise based on the months you had HSA coverage. However, remember that using the Last Month Rule binds you to the Testing Period, which requires that you maintain HSA eligible coverage through the subsequent year. If you do not, your “extra” contribution you made via the Last Month Rule will be taxed and penalized.

If you decide to use the Last Month Rule, here are some examples of when you can make that contribution:

Contribute maximum amount during any month after HSA coverage begins. You can’t open a Health Savings Account until you have HSA eligible coverage, so you can’t contribute until you have coverage. Note that doing this before December assumes you will have HSA coverage in December (and the following year).
Contribute percentage of full contribution limit each month after coverage began
Make a one time contribution any month after coverage began
Contribute full amount of $3,500 on April 14th, 2020 as a prior year contribution using the Last Month Rule

Note: Regardless of when you make your HSA contribution, when you need to complete Form 8889 for your HSA, please consider my service EasyForm8889.com. It asks you simple questions and fills out Form 8889 correctly for you in about 10 minutes.

HSA Contribution with FSA Carryover / Grace Period

Overview

We have established that you cannot contribute to an HSA if you or your spouse has a Flexible Spending Account (FSA). This is because FSA coverage is considered “other health coverage” which prevents one from being HSA eligible. Since FSA benefits extend to the holder as well as their spouse and dependents, this can disqualify some otherwise ready people from contributing to HSA’s. Per IRS form 969:

An employee covered by an HDHP and a health FSA or an HRA that pays or reimburses qualified medical expenses generally can’t make contributions to an HSA

The exceptions to the above quote include limited purpose health FSA or HRA, Suspended HRA, post-deductible FSA or HRA, and retirement HRA.

Carryover and Grace Period defined

Generally, FSA’s are “use it or lose it” type plans where any unused funds disappear at the end of the year. This contrasts sharply with HSA’s where the funds are yours forever. To cushion this blow, the IRS allows for two FSA options available to the plan administrator. Generally only one of the following can be chosen per FSA:

Grace Period – for 2.5 months following the end of the plan year, you can use prior year funds to pay for qualified medical expenses. This effectively extends the “lose it” deadline. That means up until March 15th you can still use your prior year FSA funds.
Carryover – your plan may allow up to $500 to be brought forward into the current year to spend on qualified medical expenses. You then have access to this money for the entire year. Any amount above this is forfeit. In other words, you can maintain $500 in your FSA indefinitely.

Can I contribute to my HSA if I carryover FSA funds?

These provisions effectively extend the life of your current year FSA funds. However, a fairly common scenario is ending FSA coverage with a carryover / grace period and beginning HSA eligible coverage. What happens when the FSA carryover interferes with HSA coverage? Are these people HSA eligible, and can they contribute?

HSA with FSA Grace Period

Surprisingly, the IRS provides explicit guidance to the carryover or grace period provision that many FSA’s contain. In IRS form 969 they state:

Coverage during a grace period by a general purpose health FSA is allowed if the balance in the health FSA at the end of its prior year plan is zero.

This is great because it allows an exception to the “no other coverage” clause of HSA eligibility. As long as you zero out your FSA by December 31st, you nullify the carryover or grace period impact and can contribute to your HSA per normal. This provides relief for those whose FSA coverage is ending and HSA coverage is beginning. Of course, if your FSA policy ends and you no longer have access to it, there is no effect on your HSA contribution.

HSA with FSA carryover

The IRS does not call out the FSA carryover provision and how it affects HSA contributions. I believe this is implicit since a carryover constitutes a continued access to FSA funds. If you have FSA funds available, you are not HSA eligible. However, if your FSA coverage ends and wipes out any carryover funds, you would then be HSA eligible, assuming all other conditions are met.

FSA / HSA contribution examples

Here are some common scenarios you might encounter with an FSA carryover or grace period and the effect on HSA contributions. Each scenario assumes you have an FSA in the current year and are switching to an HSA eligible plan in the new year:

FSA has carryover but no balance on Dec 31st – since you depleted your FSA by year end, you can contribute to your HSA for each month in the following year.
FSA has grace period of 2.5 months with balance on Dec 31st – since your FSA has a balance on January 1st, you are not HSA eligible until April 1st. This assumes the FSA coverage goes away and additional FSA funds are not made available.
You carryover $500 in your FSA into subsequent year – you cannot contribute to your HSA while covered by an FSA. As long as your FSA coverage continues and funds remain in your account, you cannot contribute to the HSA. Since the carryover period technically lasts all year, in theory this could make you HSA ineligible for the year.

The bottom line: use up any of your FSA funds by December 31st if you wish to be HSA eligible on January 1st.

Note: to fulfill the IRS requirement of tracking HSA receipts, please consider my service TrackHSA.com for your Health Savings Account record keeping. You can store purchases, upload receipts, and record reimbursements securely online.