From upfront tax deductions to tax-deferred growth and (potential) tax-free withdrawals, Health Savings Accounts can be an incredibly advantageous account to utilize.
But what happens if you change healthcare plans mid-year?
Whether you enroll in a new high-deductible healthcare plan mid-year, add a spouse or dependent to your plan, or lose access to the plan, it is important to understand how such changes can impact your ability to contribute.
For 2022, individuals can contribute up to $3,650 to a health savings account and families can contribute up to $7,300. Any contributions made by your employer on your behalf reduce your annual contribution amount.
Outlined below are three possible scenarios that could impact your annual contribution limit.
You enroll in an HDHP mid-year
Say on July 1st, you change jobs, and your new employer offers an HDHP, which you choose to enroll in.
Given that you will be on this plan for 6 months, your annual contribution limit is reduced to $1,825 ($3,650 divided by 12 times 6 months). Using the same example, if you and your child were to join the plan, your annual contribution limit would be reduced to $3,650 ($7,300 divided by 12 times 6 months).
You unenroll in an HDHP mid-year
Now, let’s say you change jobs or select a different health insurance plan and lose access to an HDHP.
You were covered by the HDHP from January 1st – April 30th.
Given that you were covered by the plan for only 4 months, your contribution to the HSA will be limited.
By taking the annual contribution limit, dividing by 12 and multiplying by the number of months you were covered by the plan, you can calculate your contribution limit.
In this scenario, the individual limit would be $1,216.67 ($3,650 divided by 12 times 4 months) and the family limit would be $2,433.33 ($7,300 divided by 12 times 4 months).
You add a dependent to your HDHP mid-year
Consider a scenario where you are enrolled in the HDHP on January 1st. On August 1st, you decide to add your child to your plan. In this scenario, you will have to complete two calculations.
- First, your contribution as an individual from January 1st to July 31st.
- $3,650 divided by 12 times 7 months = $2,129.17
- Second, your contribution as a Family from August 1st to December 31st.
- $7,300 divided by 12 times 5 months = $3,041.67
- Your annual contribution would be limited to $5,170.84.
Special Exception: The Last Month Rule
The last month rule states that if you are eligible to contribute to an HSA on the first day of the last month of your tax year (typically December 1st), you are considered eligible to contribute for the entire year.
For example, if you enroll in an HDHP on December 1st, even though you are only covered by the plan for one month, you could contribute the maximum annual contribution to the account if you choose to elect the last month rule.
One critical caveat to this is that by utilizing the last month rule, you must remain enrolled in an HSA-qualifying HDHP for the entire following year.
So, if you were to lose coverage or unenroll from an HSA-qualifying HDHP prior to the end of the following year, you would need to withdraw the excess funds contributed. In turn, this could be subject to taxes and penalties. That’s why if you elect to use the Last Month Rule, carefully consider potential changes to your personal situation in the following year.
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