HSA Testing rule and Last month rule

[stuartc43]

My wife Had a Family Cobra HDHP starting January 1 2024 through September 30 2024. She then switched from a Family HDHP to an individual Cobra HDHP from October 1 2024 through December 31 2024.  Never had a lapse in HDHP coverage for 2024. She is 64 years old. Had to switch to an individual due to myself dropping off COBRA plan to Medicare.  We did not make any contributions during the 2024 year. Was going to make the contributions by April 15 2025.

I know she will not meet the testing period for an HDHP for 2025 as she will go on Medicare on June 1 of 2025.

My question is if I need to be concerned about the testing rule if I contribute the prorated amount of the full year and catch up  amount. 9 months of the full 9300 for HDHP family coverage ($6975) and the  3 months of individual HDHP and catch up amount ( $1287). For a total contribution of $8262 in 2024.  I know she will not meet the testing period rule for 2025.

Does the last month rule apply in this scenario? Can not meet a testing period for 2025.  Do not want to have to pay a 10% penalty and remove from HSA.

[BillM223 · Accepted solution]

First, does your spouse have her own HSA? She should. This is because she cannot put these full contributions into your HSA (HSAs always belong to an individual, like IRAs), because you are no longer eligible. Although she can contribute money under the Family limit to your HSA, she can't contribute money under the Self-only coverage to your HSA. It's more straightforward just to open an HSA in her name. Besides in 2025, contributions to your HSA will be closed because you are not eligible at all in 2025.

Second, TurboTax always applies the last month rule, which can be an issue for taxpayers who know that they won't maintain HDHP coverage in the subsequent year.

In this case, you have to manually calculate your wife's annual HSA contribution limit with her changing coverage, and make sure that you limit your contributions to that amount.

TurboTax will figure out that she did not maintain her HDHP coverage and then lead you/her through a series of questions you don't normally see, asking you about coverage and contributions in the previous year. 

But if you limited your contributions to the amount that she would have been able to contribute if she did not use the last-month rule, then the next effect of all those irritating extra questions will be zero.

Your/her total contribution in 2024 (you must make this before April 15th and be sure that the HSA custodian knows that it is for 2024, not 2025) is 8,300 times 9 divided by 12 (subtotal 6,225) plus 1,000 times 9 divided by 12 (750), plus 4,150 times 3 divided by 12 (1038) for a total of (8,013).

I did not add in the 3 months of 1,000 catch-up because I assume that this is your HSA, and you lost eligibility when you went on Medicare. HOWEVER, if you were to create her HSA and put all these dollars into it, then because the owner of the HSA would be 55+ AND still eligible to make contributions, you could add in the catch-up for 3 months (250 for three months of catch-up) (total of 8,263). Please check my arithmetic.

NOTE NOTE: this assumes that your spouse got all of your Family coverage for 2024. Since you said that you two did not make any contributions in 2024, this is OK.

In summary, if you create an HSA for her and put the contributions (8,263) into it for 2024, this should work, and while you will have extra questions in HSA interview, you won't owe anything extra.

[stuartc43]

I forgot to add all the contributions are going into her HSA that was created in 2022.  My HSA stopped back in 2021.   I was on the Cobra family HDHP up until October 1. Medicare became my primary insurance and she was able to go to the individual HDHP.  All the Family contributions are going to her HSA for 2024 as I no longer have an HSA

[BillM223 · Accepted solution]

Good, then she can put all that money into her HSA, you will have to go through a few extra questions in the HSA interview, but won't have to pay any extra money, and you two will live happily ever after!