Last Month Rule for HSA, optional?

[ljsister2024]

Hi there,

I had a HDHP family plan Jan to March 2024, was laid off and had 2 months gap, had individual HDHP June to December 2024. When calculate 2024 contribution limit, Turbo Tax gives 5188. My question is if last month rule applies here? Can I choose not to use the last month rule?

Question 2, due to gap of HDHP in 2024, the last month rule of 2023 failed, I should return the excess contribution by April 15, but the excess contribution in 2023 will be charged 10% more taxes, which Turbotax already calculated, right?

Thank you,

[BillM223]

#1 Yes, the last-month rule applies to anyone who has HDHP coverage on December 1st of the tax year.

#2 TurboTax should realize that (1) you did not have HDHP coverage for every month of 2024, so when it asks you what type of HDHP coverage you had on December 1, 2023, (2) it will realize that you "failed to maintain HDHP coverage". Next, TurboTax will ask you a lot of questions about your coverage in 2023 and about your contributions, in order to refigure what your annual HSA contribution limit should have been in 2023 without the last-month rule.

However, you don't to do anything special, like withdraw money from your HSA. Instead, TurboTax will figure everything and asses tax and penalties on your 2024 return. This amount will appear on line 18 of the 8889.

[ljsister2024]

Thank you, but I need to return the excess contribution separately to avoid further penalty every year, right? I think the excess will be charged as income and 10% penalty.

[dmertz]

"due to gap of HDHP in 2024, the last month rule of 2023 failed, I should return the excess contribution by April 15"

To elaborate on what BillM223 said, failure to complete the testing period does not result in excess contribution for 2023, so there is no excess contribution for 2023 that can be corrected.  The fact that the testing period was not completed simply means that you own an extra tax with your 2024 tax return on the portion of the 2023 contribution that is beyond what you could have contributed were it not for the last-month rule.

[ljsister2024]

Thank you, but still don't quite get it, it only charges tax of the excess contribution for year 2024, or this charge will continue every year after that?

[dmertz · Accepted solution]

There is no excess contribution, so there is no excess-contribution penalty.  The penalty is for failure to complete the testing period and is a one-time penalty.

[ljsister2024]

Thank you! Finally it's clear to me. Wasted lots of time due to ai didn't give the correct answer.