HDHP mid year enrollment and HSA limit

[Deanna738]

My husband and I are both employed, but we have always enrolled under the health insurance plans offered by his employers. In the beginning of 2019, my husband and I were in rolled in a health plan with his employer and also had an FSA that we contributed to. In May, my husband changed employers and in June we became eligible and in rolled in his employers family HDHP coverage and he enrolled in the offered HSA. We are still enrolled in that plan. We made contributions to the HSA in 2019 up to the family-coverage limit of $7000. Now we are concerned that we have an excess contribution since he was only employed and eligible for June-December. The Last Month rule is confusing and we are not sure if it applies because we had other coverage during the first 5 months of the year. Any guidance would be much appreciated!

[Anonymous]

for 2019 you are eligible for the full $7,000 since you were covered by a family HDHP on 12/1/2019

there is a catch, to avoid recapture of any prorata portion he must maintain family coverage by a HDHP through May 2020 

[VictoriaD75]

As stated above, your $7,000 contribution should not be considered an excess contribution based on the last month rule for HSA contributions.

It works like this:

If you are, or were considered (under the last-month rule, discussed later), an eligible individual for the entire year and didn’t change your type of coverage, you can contribute the full amount based on your type of coverage. However, if you weren’t an eligible individual for the entire year or changed your coverage during the year, your contribution limit is the greater of:

1. The limitation shown on the Line 3 Limitation Chart and Worksheet in the Instructions for Form 8889, Health Savings Accounts (HSAs); or

2. The maximum annual HSA contribution based on your HDHP coverage (self-only or family) on the first day of the last month of your tax year.

Last-month rule.

Under the 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 an eligible individual for the entire year. You are treated as having the same HDHP coverage for the entire year as you had on the first day of the last month if you didn’t otherwise have coverage.

Testing period.

If contributions were made to your HSA based on you being an eligible individual for the entire year under the last-month rule, you must remain an eligible individual during the testing period. For the last-month rule, 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, 2019, through December 31, 2020).

If you fail to remain an eligible individual during the testing period, for reasons other than death or becoming disabled, you will have to include in income the total contributions made to your HSA that wouldn’t have been made except for the last-month rule. You include this amount in your income in the year in which you fail to be an eligible individual. This amount is also subject to a 10% additional tax. The income and additional tax are calculated on Form 8889, Part III.

Pub 969 Tax-Favored Health Plans