Q: How much can an employee deposit in their HSA account if they become eligible for an HSA midyear?
A: There are two “rules” for the amount an eligible individual may contribute per calendar year into an HSA:
- The “general monthly contribution rule”, which is one-twelfth of the applicable maximum contribution limit for the year for each month of the year they are HSA eligible.
- The “last month rule” which basically states an individual is treated as HSA-eligible for the entire calendar year for purposes of HSA contributions, if they are eligible on the first day of the last month of their tax year (which is Dec. 1 for most). However, to rely on this special rule, the individual must then remain eligible for the HSA through the next 12 months. (i.e. 13 months total).
Example: Joe becomes an HSA eligible individual on 12/1/2019. Joe is enrolled in single only HDHP coverage on that date.
Under the “general monthly contribution rule” Joe may contribute 1/12th of $3,500 or $291.66.
Under the “last-month rule”, he may contribute $3,500. However, Joe must then remain an eligible individual through 12/31/2020, otherwise he must include in his 2020 income when filing his taxes, the contributions made in 2019 that wouldn’t have been made except for the last-month rule.
e.g. If Joe fails to be an eligible individual in June of 2020. Joe would include $3,208.34 ($3,500 – $291.66) in his gross income on his 2020 tax return. Also, a 10% additional tax applies to this amount.
Additional contribution. If they are an eligible individual who is age 55 or older at the end of their tax year, their contribution limit is increased by $1,000. For example, if they have self-only coverage in 2019, they can contribute up to $4,500 (the 2019 contribution limit for self-only coverage ($3,500) plus the additional contribution of $1,000).
Complete details of these HSA contribution rules are found under Limit on Contributions in IRS Pub 969.
An HSA is an employee owned bank account and there are tax implications for an employee who “over contributes” when not eligible. Each employee’s situation can be unique and change throughout the year, so it’s best an employee consults their tax advisor/CPA regarding any tax issues.
The Compliance Rundown 