HSA Last Month Rule

[delano8749]

Hi, I’m new to HSAs so please forgive me if this is a naive question. I’ve searched all across the web and can’t find anything relevant to my situation as shown in the timeline below.

January – July 2021: Wife had self only employer HDHP and I was on my parents’ non-HDHP plan

August 2021 – November 2021: Wife stayed on self only HDHP, I moved to my employer’s self only HDHP after turning 26

December 2021 – March 2022: Wife left job and joined my HDHP as a family plan

March 2022 – December 2022: Wife joined new employer’s non-HDHP and I stayed on my employer’s HDHP as self only

2021: I contributed $2600 to my HSA and my wife contributed $3600 to hers

2022: I contributed $3650 to my HSA and my wife didn’t contribute to hers

Turbo Tax shows $3300 of our contribution must be included as income due to the last month rule. Is this correct and if so can anyone explain why this is the case?

Thank you very much in advance for your help!

[BillM223]

The $3,300 is plausible, however, the last-month rule is not well-understood, nor does the IRS explain it well. Worse, your situation is quite unusual in that you have different coverage types for different spouses at different times, which makes for a convoluted calculation.

In summary, the last-month rule states that if you have HDHP coverage on the first day of the last month of the year (generally December), then you can treat your annual HSA contribution limit as if based on a full year of HDHP coverage. Thus, if you had no HDHP coverage until December 1, but had Self-only starting on December 1, then you could use the full annual HSA contribution limit for Self-only, and not have to pro-rate then amount.

The bad news is that if you use the last-month rule, then in the following year, you have to maintain HDHP coverage or pay a penalty. For people who used the last-month rule in 2021, this means that you (not you and/or your spouse, but YOU) had to stay under HDHP coverage for all of 2022. 

Your spouse was OK when she moved from a Self-only to a Family HDHP policy, but "failed to maintain HDHP coverage" when she left HDHP coverage in March (or April?) 2022.

The general process of calculating the "penalty" is to calculate what your annual HSA contribution limit would have been if you had not used the last-month rule, then assess a "penalty" for the excess that you contributed had you not used the last-month rule. This is why TurboTax has to ask all the questions that it does after it realizes that your spouse failed to maintain HDHP coverage in 2022.

I could describe the process in more detail, but I would need more information from you. For example, it is the policy that you have on the first day of the month that determines what kind of coverage you have for the month. You say that your spouse had Family HDHP coverage until March 2022, but then left in March 2022. March is either one or the other. Whatever she had on March 1, 2022 is the coverage she had from the month: either Family HDHP or non-HDHP. Thus she would have had Family HDHP coverage until February 2022 and begun non-HDHP in March, or has Family HDHP until March and begun non-HDHP in April 2022.

[delano8749]

Thank you for the quick and detailed response!

If I understand correctly, I would be the one that the last month rule applies to because I started my HDHP in August of 2021. My wife was on a HDHP for the entirety of 2021 (her employer's from January - November 2021 and my employer's in December 2021). 

On my end, I maintained an HDHP for the entirety of 2022 which I believe would satisfy the testing period, so I am still confused why we would owe any penalty. 

[BillM223]

Yes, you did not have HDHP coverage all year. However, it appears to me, based on your data, that your spouse switched from Self-only to Family coverage in December, 2021. In any case, you have two spouses sometimes with Self-only and Family, which makes the calculation complex - there is an example of this in Pub 969 at the IRS website.

So do me a favor, if you would, and please tell me the exact dates that each insurance policy took effect, like    ***example*** please update this 

Spouse - Jan 1, 2021 to November 15, 2021 - Self only HDHP 

Spouse - November 16, 2021 to December 2, 2021 - Self Only HDHP

Spouse - December 3, 2021 to March 15, 2022 - Family HDHP

and so on.

In other words, don't give me a month and year, but 

always a day, month, and year, when the insurance starts and ends,

the spouse (you or her or both), 

and the type of insurance: HDHP or not, and if HDHP, then, Self-only or Family. 

It may be aggravating, but I can't tell you exactly what TurboTax did without it.

Also, when you finish, at the bottom, enter "@" and "BillM223" (without the space in between) so that I will be notified of your answer.

[delano8749]

@BillM223

Spouse - January 1, 2021 to November 30, 2021 - Self only HDHP 

Spouse - December 1, 2021 to March 31, 2022 - Family HDHP

Spouse - April 1, 2022 to December 31, 2022 - non-HDHP through employer

Me - January 1, 2021 to July 31, 2021 - non-HDHP through parents

Me - August 1, 2021 to November 30, 2021 - Self only HDHP

Me - December 1, 2021 to March 31, 2022 - Family HDHP

Me - April 1, 2022 to December 31, 2022 - Self only HDHP

[ShirlynW]

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

For more information