Tag Archives: Last Month Rule

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 If Changing Coverage Next Year

This question was submitted by an HSA Edge reader. Feel free to send in your question today to evan@hsaedge.com.

My current insurance plan is HSA compatible, which I’ve had since January 1st, 2017. On January 1st of 2018 I am changing to a plan that is not HSA compatible. If I contribute this year and not in 2018, will I be penalized on the money contributed in 2017?

People are often concerned about over contributing to their HSA, likely on account of how easy it is to use (and abuse) the Last Month Rule. Its use allows you contribute more to your HSA in the current year, but binds you to the Testing Period, which requires you to maintain additional coverage into the following year. If you fail to do that, taxes and penalties await you.

The point to remember is you can never be penalized for contributing for months where you actually had coverage (see: Not Using the Last Month Rule when Coverage Changes). So in your case, you had coverage for 12 months in 2017 and are allowed to contribute for 12 months in 2017, which is 100% of the HSA contribution limit. In fact, the Last Month Rule doesn’t apply to you since you had coverage all year – you can’t possibly contribute more. But consider the scenario where you had coverage for only 7 months, say from June – December. You would have “earned” those 7 months and could contribute 7/12 of the contribution limit for the year without risk. However, you would also have the option to use the Last Month Rule and contribute the full year contribution limit, effectively contributing for those 5 months you weren’t covered.

This then puts you at risk since you are using the Last Month Rule to contribute more than you otherwise could have. This is allowed, and often a good idea, but if you fail to continue HSA coverage for the following 12 months (through next December), you will fail the Testing Period. This is where extra taxes and penalties come to bite you. In the prior example, those 5 months you didn’t have coverage would be added back to income (so they are taxed), plus a 10% penalty would be applied.

So using the Last Month Rule has a risk, but know that you can always play it safe and only contribute for the actual months you had coverage. If you know you are losing HSA coverage due to insurance/job/Medicare changes, do not use the Last Month Rule.

Note: if you need help with Last Month Rule calculations, or just need to file your Form 8889, please consider using my service EasyForm8889.com. It asks simple questions in a straightforward way and will generate your completed HSA tax forms in 10 minutes. It is fast and painless, no matter how complicated your HSA situation.

Last Month Rule Coverage Gap During Testing Period

This question was submitted by HSA Edge reader Paul. Feel free to send in your question today to evan@hsaedge.com.

What is the impact if I use the Last Month Rule and during the subsequent 12-month period I have a 1-month gap. Let’s say that I start my HSA on November 1st, then have Medicare in January, then have an HSA for the balance of the year. Do I have 10 months of excess contributions or one 1 because of January?

A condition of using the Last Month Rule is to abide by the Testing Period, which requires that you maintain HSA eligible coverage for the subsequent year. The Testing Period evaluates your status on the first day of each month; if you have HSA eligible coverage then you are considered covered by the HSA for that month.

If you had non HSA eligible coverage on the 1st of January you would fail the Testing Period. The result of this is any additional contribution from the prior year (above and beyond the 2 months you had coverage) is added back to income and taxed. Unfortunately, this occurs for the full (over) contribution amount, even if it was just 1 month missed in the Testing Period.

The penalty calculation is a bit tricky and if you need help, I recommend my site EasyForm8889.

Note: if you need help accounting for your HSA penalties from the Last Month Rule, please consider using my service EasyForm8889.com to complete Form 8889. It asks simple questions in a straightforward way and will generate your HSA tax forms in 10 minutes. It is fast and painless, no matter how complicated your HSA situation.