If a HDHP is on plan year (starts on a date other than January 1), how does that work with HSA contribution maximums?

The IRS regulates HSA plans and publishes its guidance in Publication 969‡. The IRS allows two methods for figuring out an accountholder's personal maximum contribution. Accountholders may use the method that results in the highest contribution.

  1. Sum of Monthly Contribution Limits Method
    • The sum of each month's prorated contribution amount (1/12 of the annual maximum based on the HDHP coverage type the accountholder had on the first of each month). For this method, as long as the accountholder is 55 by the end of the year, they may also add $83.33 (1/12 of $1,000) to each eligible month. 
    • Examples of people who should use this method include those who are not eligible on December 1 of the current year, those who don't plan to be eligible all of the following calendar year, and those who switch from family HDHP for the majority of the year to individual HDHP for the remainder of the year.
  2. Full Contribution Method (also known as the Last Month Rule)
    • Anyone eligible on December 1 can contribute the entire annual maximum based on their coverage type on December 1, plus catch-up contribution of $1,000, if the accountholder is 55 anytime during the year. This method is subject to a testing period.

The only people who should use this method are those who plan to be eligible for HSA contributions all 12 months of the following calendar year. Those who do not remain eligible for the following calendar year will be subject to income taxes and a 10 percent penalty on any contributions more than the amount that could have been contributed using the Sum of Monthly Contribution Limits Method.

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