HSA last month rule seems incorrect

[needinghelp1]

I believe TurboTax is incorrectly suggesting my spouse and I utilized the last month rule. I think I have a workaround for how to fill out the form so it shows correctly on my 2021 return.

Spouse and I are married filing jointly. We were both on Self only HDHP plans starting Jan 1 2020. In August 2020, I switched onto his plan and so we were on a Family HDHP plan. In 2021, we were still covered by the same Family HDHP plan, and then in June 2021 we switched to a low deductible plan. We combined contributed $7,100 in 2020 (since we were both covered by a HDHP plan the entire year), and $3,000 in 2021 (pro-rated for the months we were on the HDHP plan). So I don't think the last month rule applies here.

TurboTax realizes that we were not on a HDHP plan for the entirety of 2021 ("I had different plan types at different times of the year"), we had Family coverage in Dec 2020, and the Family coverage started in August 2020.

I think it's this last part about Family coverage starting in August 2020 is leading TurboTax to believe that we leveraged the last-month rule since we contributed the full $7,100 in 2020. As a workaround, if we fill out TurboTax to indicate we both had Family coverage throughout all of 2020 (we technically didn't, but my Self coverage + his Self coverage adds up to Family coverage contribution amount), then the "Additional income under the last-month rule" goes to $0.

Does this workaround make sense to use? Or does the last month rule apply in our situation (if it does, could you explain why?). Thank you!

[Mike9241 · Accepted solution]

 there is no such thing as a joint HSA

and yes Turbotax is messed up because it assumes if you had coverage on 12/1 you are using the last month rule.

the LMR is from IRC 223(b)(8) 

(8)Increase in limit for individuals becoming eligible individuals after the beginning of the year
(A)In general
For purposes of computing the limitation under paragraph (1) for any taxable year, an individual who is an eligible individual during the last month of such taxable year shall be treated—

that is not your situation so the LMR should not apply

the basic limits come from IRC 223(b)(1) and (b)(2)

which proscribe a monthly calculation of the eligible amount (from IRS Notice 2008-52)

 Under §§ 223(b)(1) and (2), the maximum annual
contribution to an HSA is the sum of the
monthly contribution limits determined
separately for each month, based on eligibility and health plan coverage on the
first day of the month. For this purpose,
the monthly limit is 1/12 of the indexed
amount provided under § 223(b)(2)(A) for
self-only coverage ($2,900 for 2008) and
under § 223(b)(2)(B) for family coverage
($5,800 for 2008).

this is from IRS PUB 969 section on HSA

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.

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.

I agree with you that there is no requirement to use the LMR.

so for 1/1--7/31/20 each of you could contribute to your HSA $3650* 7/12 =$2070.83 for both in total $4141.66

for 8/1/ -12/31 since you had family coverage the balance of $2958.34 could be contributed to your HSA a/c's. this can be split evenly or any way you want. since you had family coverage during those months

there is a rule that says if either spouse has family coverage both spouses are treated as having family coverage. The contribution limit is split evenly between the spouses unless they agree on a different allocation.  

a way to look at this for 2020 is that a minimum of 2070.83 had to go into both a/c's and the balance split any way you want.

 in Turbotax 2021 the 8889 for each of you has section III which relates to failure to maintain HDHP when using the LMR. this should all be blank since you didn't use it.  then 2021 should d not be a problem

[lhopkins25]

Working on our 2025 return, spouse had HDHP for all of 2024 and 9 months of 2025 before going on medicare.  Turbo tax is applying the last month rule saying we owe, this is not correct.

[RogerD1]

Your spouse would not have met the requirements for the "last month" rule.  From IRS Publication    :

"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, 2024, through December 31, 2025).

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."

Since your spouse did not have the HDHP at the end of 2025, they would not have met the "last month rule"

Another possibility:

If your spouse had applied for Social Security, he or she would have received Medicare Part A coverage that could be back dated up to 6 months to their 65th birthday.  One can't contribute to an HSA once enrolled in Medicare, so it's possible that up to 6 months of contributions could be considered excess contributions if this rule is not met.

[cas]

I don't agree with your response.  I have EXACTLY the same situation as lhopkins25.  My spouse had an HDHP for all of 2024 and the first 9 months of 2025.  Then had medicare the last three months of 2025.  Since they had an HDHP and HSA for all of 2024 and previous years, I do not believe the "last month rule" applies.

Turbo tax asks for the kind of HDHP coverage for each month of the prior year - 2024.  I filled in self  plan for each month and Turbo Tax computes income of $429 plus 10% penalty under the last month rule.

If I go back and change the Jan 2024 month to say they had "Medicare or None", then suddenly the additional income and penalty goes away.  So something is definitely wrong in TurboTax.

[cas]

Some more info on the last month rule and testing.  I believe the last month rule only applies if you had coverage on Dec 1 but did not have it for the entire year.  Coverage on Dec 1 allows you to make full HSA contributions for the year, BUT you are then subject to the testing period.

If you had coverage for ALL of 2024, then you are not subject to the testing period and the last month rule does not apply.

[cas]

lhopkins25 if you filled in the table for 2024 indicating "Self plan" for every month, go take a look at the generated Form 8889 Smart Worksheet.  Specifically the Line 18 Smart Worksheet.  You will see that Turbo Tax has marked January as having "none".

Now go back and set the January 2024 month to "Medicare or none".  The Line 18 Smart Worksheet will now show that January has "Self-only" checked.

Hopefully they fix this but we can always use this as a workaround if they don't.

[lhopkins25]

Thanks that worked but agree TurboTax needs to provide a fix to this bug.

[cas]

I haven't figured out how to report a bug yet.  I doubt a post here will do it.

[BillM223]

cas, you can report issues by describing them to me or other employees here in the Community.

I appreciate the detail that you gave. Your description of marking every month in 2024 as Self, yet January is marked as NONE is very strange to me, and the "fix" is to set January to Medicare or None which sets January to Self makes as little sense to me as to you.

However, let me say two things:

1. On a clean test return, I have been unable to reproduce your example (2024, Self in every month does not show None for January on Line 18), and

2. I have seen a number of issues that have apparently been addressed in the last week with no notice (to us anyway), so perhaps I could believe anything.

In any case, I don't see it happening any longer. Please let me know if you see this return or something else.

[cas]

BillM223, I just downloaded today's updates and the problem is still there.  Here's my set up for HSA contribution:

Primary Tax Payer: No HDHP.  No HSA contribution.

Spouse: Had HDHP January thru September.  Contributed $3975 to HSA for 2025.

Had Medicare in Oct, Nov, and Dec

The next screen after entering the coverage for each month in 2025 asks the kind of coverage on Dec 1, 2024.   I set it to "Self".

Next screen asks for total contributions for 2024.  Entered $5150.

Next screen asks for the coverage for each month in 2024.  Set every month to "Se;f Plan".

Next screen shows $429 additional income under the last-month rule.

Now go back to previous screen and change January 2024 to "Medicare or None".

Go to next screen and there is NO additional income.

I've sent a Diagnostic copy of my return.  Token Number:

126748149-69851633

Hope it helps.

[BillM223]

I am looking into this. As a workaround, look at your spouse's 8889 (8889-S).

Look at the Line 18 Smart Worksheet. You will notice that January of 2024 is inexplicably set to NONE.

Set January to Self, and the last-month rule amount (shown on lines 18 and 20) should vanish, along with the penalty on line 21.

If you close and reopen your return, please check to make sure this hasn't resurfaced.

[cas]

When you say:

"Look at the Line 18 Smart Worksheet. You will notice that January of 2024 is inexplicably set to NONE.

Set January to Self, and the last-month rule amount (shown on lines 18 and 20) should vanish, along with the penalty on line 21."

Are you saying to change it on the Line 18 Smart Worksheet?

I tried that and it did make the last-month rule amount go away.  However, when I went back through the step-by-step screens, January 2024 has been toggled back to "Medicare or None".  So might as well just set that there for now.  Hopefully there will be a fix to this.

[BillM223]

Yes, it might as well be in the interview - if it stays there. I am concerned that since TurboTax Desktop is changing the initial interview entry, that it may do it again the next time you run through the interview or even close and open the tax return.

In any case, you will want to check the income added on line 8f on Schedule 1 (1040) and on line 17d on Schedule 2 (1040) to make sure that they are not there just before you file. 

I have initiated the process wherein the situation will be reviewed and any additional action will be made.

@cas 

[lhopkins25]

I also downloaded the update yesterday and tried again.  Spouse had HDHP all of 2024 and first 8 months of 2025, then went on medicare. HSA contribution for 2025 was $3533,  2024 HSA contribution was $5150.  I still get the last month $429 issue which is incorrect.  When I go to form 8889 and change 2024 January to Self the $429 goes away.