Tag Archives: Last Month Rule

Can I use the Last Month Rule for my first year on HSA?

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


In 2015 I had health coverage under my spouse’s PPO. We divorced and I went on the Health Exchange effective July 1. I also opened a HDHP and an HSA account effective July 1, 2015. I contributed the full family amount of $6650 because my kids are on it too.

It was my understanding that as long as I was an eligible individual on December 1, 2015, I could deduct the full $6650 on my 2015 return. According to the Last Month Rule, I thought I would have a testing period for the next 12 months (and I do plan on staying on this same plan with HSA). My accountant is saying I have to prorate for 6 months, and I can only deduct $3325. Is he correct? If he is, I don’t understand the point of the Last Month Rule.

Thanks for your email, you are exactly correct in your interpretation of the Last Month Rule. For reference, here is a detailed article about the HSA Last Month Rule / Testing Period.

Your accountant is correct that the general theme of calculating Line 3 (contribution amount) is pro rata across months. See this post on Determining your Contribution Limit. However, like you said, there is an exception which is the Last Month Rule and your situation appears to fully warrant its use. Per Form 8889 Instructions:

Last Month Rule: if you are an eligible individual on the first day of the last month of your tax year (December 1 for most taxpayers), you are considered to be an eligible individual for the entire year.

Thus, as long as you have health insurance on December 1st, you can contribute up to the full amount for that year’s contribution limit, based on the type of insurance you had on December 1st (Family / Single).

But as Jennifer astutely pointed out, she has to maintain compliance with the Testing Period. Again, back to Form 8889 Instructions:

Testing Period: you must remain an eligible individual during the testing period. The testing period begins with the last month of your tax year and ends on the last day of the 12th month following that month (for example, December 1, 2015 – December 31, 2016). If you fail to remain an eligible individual during this period, other than because of death or becoming disabled, you will have to include in income the total contributions made that would not have been made except for the last-month rule. You include this amount in income in the year in which you fail to be an eligible individual. This amount is also subject to a 10% additional tax.

Thus, if you take advantage of the HSA’s Last Month Rule, make sure you plan on maintaining HSA eligible health insurance for the following year. Otherwise, the next year you will face a penalty in Part III of Form 8889 for 10%, plus owe taxes on that amount.

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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.

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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.

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    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.

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    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.