From the Hotline: HSA Contribution Timing
Question: We added a high deductible health plan (HDHP) effective as of our medical plan renewal date of December 1, 2014. The HDHP deductible is accumulated on a plan-year basis. An employee wants to deposit the full annual contribution into his health savings account (HSA) in December of 2014 and then restart the contributions and deposit the full annual contribution into his HSA from January 2015 – December 2015. Can he do that even though the HDHP plan deductible does not reset on January 1, 2015?
Answer: Yes, the employee would be eligible to contribute up to the full annual amount to his HSA for both 2014 and 2015 — but only if he meets specific criteria. Under IRS rules for HSAs (IRS Publication 969), a special “last-month rule” (sometimes called the “13-month rule”) allows taxpayers to make the full annual HSA contribution for a calendar year if the individual is HSA-eligible on December 1 of that year and remains HSA-eligible throughout the following calendar year. For instance, this employee may take advantage of the special last-month rule if:
- No later than December 1, 2014, the individual meets all HSA-eligibility criteria (i.e., the employee has qualifying HDHP coverage, does not have any disqualifying health coverage, is not enrolled in Medicare, and is not the tax dependent of another taxpayer); and
- The individual maintains HSA eligibility throughout the continuous period from December 1, 2014 through December 31, 2015.
Note that since your HDHP runs on a December 1 plan year, the employee would have re-elect the HDHP for the plan year beginning December 1, 2015 in order maintain HSA eligibility through calendar year 2015. Cafeteria plan elections with respect to group health coverage are irrevocable for the 12-month plan year (other than permissible election changes in connection with certain change-in-status events, such as marriage). That means the employee would not be able to change his enrollment in the HDHP during the December 1, 2015 through November 30, 2016 plan year (unless he experiences a qualifying change-in-status event). He could, however, change his HSA contribution amount election during the year since that item is not subject to the change-in-status rules.
If the employee failed to remain HSA-eligible throughout the last-month-rule period, other than because of death or becoming disabled, the employee would have to include in his or her income the total contributions made to the HSA that would not have been allowed except for the last-month rule. The disallowed amounts must be included in taxable income in the tax year in which the employee failed to be HSA-eligible. Those amounts also are subject to a 10 percent additional tax. The income and additional tax are shown on Form 8889, Health Savings Accounts (HSAs), Part III. Employees should consult with their personal tax advisors to understand the potential adverse tax consequences if HSA eligibility is not maintained through the 13-month period.