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Health Savings Accounts (HSAs) ... Contributions Q&A

Posted by Russ Swallow on Fri, Nov 04, 2011 @ 04:31 PM
  
  
  
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 HSA Contributions – Q&A #1

Q. What's the maximum contribution that individuals can make if they become HSA eligible mid-year or lose their eligibility before the end of the year?
 
A. HSA eligibility is generally determined as of the first day of the month. However, HSA accountholders who become HSA eligible after January 1 and are HSA eligible on December 1 of  that same calendar year may utilize a special “last-month rule” (see below) to make a full HSA contribution for that year.  
 
General Rule: “Sum of the Monthly Contribution Limits Rule.” Accountholders’ annual HSA contributions are pro-rated based on the number of months they are HSA eligible during the year. If they are enrolled on a family contract, the statutory maximum annual contribution is $6,150 in 2011, which works out to $512.50 per month. If, for example, they become HSA eligible October 1, 2011, and cease to be eligible on November 30, 2011, they are eligible for two months (October and November). To determine the maximum contribution for calendar year 2011, multiply the monthly maximum contribution figure by two months, for a total of $1,025.
 
Special Rule: “Last-Month Rule.” This special rule (which comes with a testing period requirement noted below) permits a full year’s worth of HSA contributions to be made on behalf of someone who is HSA eligible for only a portion of the year, provided he or she is eligible on December 1 and remains eligible through the end of the following 12-month “testing period.” The testing period ends on December 31 of the following year (2012 in the above example). If they lose HSA eligibility any time before December 31, 2012, they must include any contributions for months during which they were not eligible, except for the last-month rule, in their taxable income in the year they lose eligibility. In addition, excess contributions are subject to a 10% additional tax that year. Accountholders incur this penalty regardless of age. 
 
If an individual loses HSA eligibility during the year and he or she is not an HSA eligible individual on December 1, he or she must pro-rate the contribution based on the number of months eligible on the first day of the month. This is because the last-month rule is only available if individuals are HSA eligible on December 1. For example, if individuals switch jobs mid-year, drop their self-only HSA-qualified health plan and move to their new employer’s non-HSA plan effective July 23, 2011, they must pro-rate their contribution using the “Sum of the Monthly Contribution Limits” approach. Their maximum contribution is 7/12 of the self-only contribution, since they were HSA eligible for only seven months. They can contribute no more than $254.17 per month, or $1779.17 for the seven months they were HSA eligible during 2011.
 
We recommend that you review these issues with legal counsel.
 

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COMMENTS

As usual Russ, great information. HSA are where the industry is heading.

posted @ Saturday, November 05, 2011 9:42 AM by David W. Lima

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