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Last month rule/refiguring contribution limits

What is the last month rule?

Last-month rule. Under the last-month rule, if you are an eligible individual on the first day of the last month of your tax year (December 1 for most taxpayers), you are considered an eligible individual for the entire year. You are treated as having the same HDHP coverage for the entire year as you had on the first day of that last month.

Testing period. If contributions were made to your HSA based on you being an eligible individual for the entire year under the last-month rule, you must remain an eligible individual during the testing period. For the last-month rule, the testing period begins with the last month of your tax year and ends on the last day of the 12th month following that month. For example, December 1, 2016, through December 31, 2017.

 

Example #1

Sally, age 52, starts a new job and becomes an HSA eligible individual on December 1, 2016. She has a family HDHP coverage which begins on that date. Sally decides to use the last month rule and contributes $6,750 to her HSA.

Sally fails to be an eligible individual in June 2017 because she either switched insurance plans or cancelled her HDHP. Because Sally did not remain an eligible individual during the testing period (December 1, 2016, through December 31, 2017), she must include in her 2017 income the contributions made in 2016 that would not have been made except for the last-month rule. Sally uses the worksheet for line 3 in the Form 8889 instructions to determine this amount.

January

-0-

February

-0-

March

-0-

April

-0-

May

-0-

June

-0-

July

-0-

August

-0-

September

-0-

October

-0-

November

-0-

December

$6,750.00

Total for all months

$6,750.00

Limitation. Divide the total by 12=

$562.50

Sally would include $6,187.50 ($6,750.00 –$562.50) in her gross income on her 2016 tax return. Also, a 10% additional tax  would then be applied to this amount.

 

Example #2

Roland, age 32, a recent college graduate started a new job and has self-only HDHP coverage on January 1, 2016. Roland gets married and changes to family HDHP coverage on November 1, 2016. Because Roland has family HDHP coverage on December 1, 2016, he contributes $6,750 for 2016.

Roland fails to be an eligible individual in March 2017, and because he did not remain an eligible individual during the testing period (December 1, 2016, through December 31, 2017), he must include in his income the contribution made that should not have been made under the last-month rule. Roland uses the worksheet for line 3 in the Form 8889 instructions to determine this amount.

January

$3,350.00

February

$3,350.00

March

$3,350.00

April

$3,350.00

May

$3,350.00

June

$3,350.00

July

$3,350.00

August

$3,350.00

September

$3,350.00

October

$3,350.00

November

$6,750.00

December

$6,750.00

Total for all months

$47,000.00

Limitation. Divide the total by 12=

$3916.37

When Roland files his taxes he would include $2833.63 (6,750 - $3,916.37) in his gross income on his 2016 tax return. Because he did not remain eligible during the testing period, a 10% additional tax would be applied to this amount.

 

 

From IRS Publication 969:

The testing period in this example was December 1, 2016- December 31, 2017

 References:

https://www.irs.gov/pub/irs-pdf/p969.pdf

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  • Avatar
    Michael Young

    Question:

     I was eligible October 1 2013 for my HDHP.  However, I did not open an HSA account until Jan 2014. Can I still make contributions to the HSA account for the year 2013? If so, how much?

     

    Answer:

    You can make a 2013 full contribution under the last-month rule so long as you establish the account and make the contribution before the deadline for filing (generally, April 15)  and attribute it to the 2013 tax year both with your HSA custodian and on your tax return. If you do not think you will qualify under the last-month rule, you can contribute a pro-rated amount of the statutory max for the full months you were eligible.

    Keep in mind, you cannot use that money for any medical expenses incurred prior to the establishment date of the HSA.