We all know that to be able to contribute to an HSA you need to have an HSA-eligible high deductible health plan (HDHP) and no other coverage. The HSA contribution limit looks quite straight-forward at first glance. There’s one limit for individual coverage, and there’s another limit for family coverage, which is about double the limit for individual coverage, give-or-take. If you are 55 or older, there’s an extra $1,000 catch-up.
So far so good if you have just one health plan throughout the entire year. It gets more complicated when you are married and the two of you are on different health plans. It gets yet more complicated when your health insurance changes mid-year. The insurance change could be due to a job change, marriage or divorce, enrolling in Medicare, birth of a child, and so on.
Example 1: Husband has HDHP covering himself. Wife has non-HDHP insurance from her own employer. Wife quits mid-year and husband adds her to his HDHP.
Example 2: Husband and wife have HDHP covering both of them (no kids). Husband enrolls in Medicare mid-year. Wife continues HDHP for just herself.
What’s the HSA contribution limit in these situations?
Before we continue, it’ll be easier if we understand some ground rules.
Limit On Contributions, Not On Spending
The limits on having two plans or mid-year changes are all about contributions, i.e. putting money into the HSA, not on spending the money already in the HSA. Once the money is in the HSA, it can be spent on any qualified medical expenses incurred by all members of the family (yourself, spouse, and dependents) regardless whose name is on the HSA or whether that person is covered by the HDHP.
No Joint HSA
Although there is a higher contribution limit for family coverage and, once contributed, the money in the HSA can be used to cover eligible medical expenses incurred by anyone in the family, the HSA is in one individual’s name only. There is no joint HSA. Each person’s eligibility to contribute to his or her HSA is determined separately.
This is probably the most important part in understanding the HSA contribution limit. Once you drill this into your head, everything else becomes easy.
No HDHP Coverage = No Contribution
Because it’s an individual account, only the person who has HDHP coverage can contribute. Suppose the dad covers himself and kids in a family HDHP and the mom has her own non-HDHP coverage. Only the dad can contribute to an HSA in his name (at the family coverage level). If the mom is over 55, she’s not able to contribute her $1,000 catch-up because she doesn’t have HDHP coverage.
Age 55 Catch-Up In Own Account
Again, because an HSA is in one individual’s name, the person who is 55 or over can contribute the catch-up only to his or her own account if he or she is eligible for a contribution to begin with. If both husband and wife are 55 or over, they must have separate accounts if they want to contribute the maximum.
Both Covered By Family HDHP = Split Contribution
If both husband and wife are covered in a family HDHP, they can split the family-level HSA contribution limit between the two of them however they want. It can be 100% into one person’s HSA, 50:50 into separate HSAs in each person’s name, or anywhere in between. It would be easier to understand if you simply split 50:50.
Family + Single = Family
If one spouse in a married couple has self-only coverage and another spouse has family coverage (with kids, for example) through a separate plan, they are both treated as having family coverage. They must share one family coverage limit as if they have only one family plan.
2 Self-Only Plans Are Not Family Coverage
On the other hand, if husband and wife each has their own self-only HDHP, they can only contribute to two separate HSAs in their own names at the individual level. They can’t contribute at the family coverage level to just one person’s HSA.
When insurance coverage changes mid-year, you break it down month-by-month. You fill out a table like this:
For every month and each person, you put down the contribution limit for that person according to the rules above. If a person is eligible on the 1st of the month and is not enrolled in Medicare in that month, he or she is considered to be eligible for the entire month. If a person is 55 or over at the end of the year, add $1,000 to each month he or she is eligible.
Let’s take a look at our Example 1:
Husband has HDHP covering himself. Wife has non-HDHP insurance from her own employer. Wife quits mid-year and husband adds her to his HDHP.
It looks like this if both of them are 55 or over at the end of the year:
|Jan||self + 1,000||0|
|Feb||self + 1,000||0|
|Mar||self + 1,000||0|
|Apr||self + 1,000||0|
|May||self + 1,000||0|
|Jun||self + 1,000||0|
|Jul||self + 1,000||0|
|Aug||self + 1,000||0|
|Sep||1/2 family + 1,000||1/2 family + 1,000|
|Oct||1/2 family + 1,000||1/2 family + 1,000|
|Nov||1/2 family + 1,000||1/2 family + 1,000|
|Dec||1/2 family + 1,000||1/2 family + 1,000|
Remove the “+1,000” part from either person who isn’t 55 or over at the end of the year. The “1/2 family” part can shift either way to one person. Then you take an average of the 12 months. That’s the contribution limit for the year for each person.
Example 2 is a mirror image of Example 1:
Husband and wife have HDHP covering both of them (no kids). Husband enrolls in Medicare mid-year. Wife continues HDHP for just herself.
Again, if both of them are over 55 at the end of the year, it looks like this:
|Jan||1/2 family + 1,000||1/2 family + 1,000|
|Feb||1/2 family + 1,000||1/2 family + 1,000|
|Mar||1/2 family + 1,000||1/2 family + 1,000|
|Apr||0||self + 1,000|
|May||0||self + 1,000|
|Jun||0||self + 1,000|
|Jul||0||self + 1,000|
|Aug||0||self + 1,000|
|Sep||0||self + 1,000|
|Oct||0||self + 1,000|
|Nov||0||self + 1,000|
|Dec||0||self + 1,000|
Again, remove the “+1,000” part from either person who isn’t 55 or over at the end of the year. The “1/2 family” part can shift either way to one person. Then you take an average of the 12 months. That’s the contribution limit for the year for each person.
The Last Month Rule
Finally there’s a “last month rule” that says if you are eligible on December 1, you can claim to be eligible for the entire calendar year even if you weren’t eligible earlier in the year. The big catch is that you have to keep your eligibility at this level for the following twelve months (January – December the following year).
If you fulfill your promise, you are forgiven for not being eligible earlier in the year and you can contribute more than you otherwise can. If you break your promise for whatever reason, you will have to go back and remove the amount you over-contributed and pay taxes and penalty.
It’s a gamble that may not be totally under your control. Say you become eligible to contribute to an HSA late in the year. You invoke the last month rule and you contribute the full-year maximum. You intend to stay in the HSA-eligible plan the next year also, but you switch jobs (voluntarily or involuntarily) and your new employer doesn’t offer an HSA-eligible plan. Now you have to jump through hoops to calculate the excess contributions you made for the previous year and figure out how to report the income and penalty on your tax return.
For this reason I don’t recommend using the last month rule. Just contribute based on your actual month-by-month eligibility.
- IRS Publication 969
- IRS Form 8889 Instructions
- HSA Contribution Rules for Married Couples, UMB Financial
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