Can a job loss leading to losing HDHP coverage impact the "last month rule"?

[tara-brady-dinter]

I had a self-only HDHP in all 2024, but only two months in 2025, because I was laid off from my job in February. I was then added to my husband's Family HDHP (joining him and our children). Then he was laid off from his job in August. We had our HDHP via Cobra until October when we attempted to find a new, less expensive plan via the healthcare marketplace (since we were both unemployed at the time). Only to learn that I was ineligible for a marketplace plan, and me and my children were pushed over to our state's Medicaid program. My husband was able to get a plan through the marketplace. I'm entering all of our HSA info for 2025, but TurboTax is showing that my 2024 HSA contributions have to reported as income since I wasn't covered by an HDHP all of 2025. But for the aforementioned reasons, this doesn't seem right. The only exceptions it seems to deem allowable are death or disability...nothing about job loss. Is there a different way I need to approach this?

[BillM223]

Unfortunately, this is correct. Since you used the last-month rule in 2024***, you had to maintain HDHP coverage for all of 2024, or have your contributions recalculated for 2024. Death or Disability are explicitly the only two reasons specified to avoid this issue.

You listed that you had Self-only coverage for all of 2024, while you implied that your husband had Family coverage in 2024 (did he in 2024?). Did TurboTax tell you on your 2024 tax return if you had excess HSA contributions?

By keeping the HDHP coverage in 2025 via Cobra, you were doing the right thing; however, when you went on Medicaid, that caused the "failure to maintain HDHP coverage".

Sadly, the rules for HSAs are far more complex than one would think, and it is difficult to figure out in advance what you should be doing. That's why I want to know if you had excess contributions in 2024.

*** The last-month rule allows you to use the full annual HSA contribution limit if you have HDHP coverage on December 1, 20XX, no matter how few months you had coverage during the year. It's a great benefit to those just starting on an HDHP plan. However, it does require that you "maintain" HDHP coverage for the full following year.

Please note that failure to maintain HDHP coverage does not necessarily cause a penalty in the previous year. What happens is that TurboTax checks to see if your 2024 contributions were in excess of the HSA contribution limit for that year, without the last-month rule. For many taxpayers, if they had HDHP coverage for the entire year, they would not have excess contributions for the HDHP coverage that they actually had, so no penalty.

[dmertz]

"I had a self-only HDHP in all 2024"

I read this as indicating that the last-month rule was not used in 2024, so I'm not sure why there is any question about the last-month rule.  Perhaps the answer provided to 2025 TurboTax's confusing question regarding 2024 HDHP coverage resulting in TurboTax behaving as if the last-month rule was used in 2024 when it was not.  One can avoid 2025 TurboTax acting as if the last-moth rule was used in 2024 by answering None when asked about the type of coverage in 2024.