Annual HSA Contribution Limits: Each year, the IRS announces the maximum amount that an HSA account holder can contribute to a health savings account. If an individual is eligible for the entire calendar year (January 1st to December 31st), they may contribute the full maximum amount, depending on their age and coverage type.

Catch-Up Contributions for Age 55+: In the year a person turns 55, they are eligible to make the full $1,000 catch-up contribution, regardless of when their birthday falls—as long as they have qualified coverage for the full year.
This $1,000 catch-up amount does not need to be prorated.

But what happens if an individual’s HSA-eligibility ends before the end of the year, or if they don’t become eligible until later in the year?

Partial-Year Eligibility and Prorated Contributions

If HSA eligibility ends before December 1st, special rules apply.

If someone loses or drops their HSA-qualified coverage before December 1st, they must prorate their contribution based on the actual months of coverage.

  • Any excess contributions and earnings on those contributions must be reported as taxable income

  • They are subject to a 6% penalty for each year the excess remains in the account

Good news: Excess contributions can be withdrawn before the tax filing deadline (April 15th) with no penalty.

Example: Partial-Year Eligibility (Bob)

  • On January 1st, 2019, Bob elects single HSA-qualified coverage through his employer

  • He is covered from January through May, then loses his job and does not elect COBRA

  • He joins his wife’s non-HSA-qualified plan and becomes ineligible for an HSA

Because his eligibility ended before December 1st, Bob must prorate his contribution:

  • 2019 single coverage max = $3,500

  • $3,500 ÷ 12 = $291.67/month

  • Covered for 5 months: 5 × $291.67 = $1,458.33

If Bob contributed more than $1,458.33, he must withdraw the excess by April 15th to avoid taxes and the 6% penalty.

The Last Month Rule

If an individual is eligible on December 1st, they may use the “last month rule” (also called the full contribution rule).

This rule treats the person as having had that level of coverage for the entire calendar year.

So, if someone has family coverage on December 1st, they can contribute the full family maximum, even if they were only eligible for part of the year.

Example: Last Month Rule (Suzy)

  • On August 1st, 2019, Suzy signs up for single HSA-qualified coverage

  • On October 1st, she adds her husband Gary to the plan (now family coverage)

  • On December 1st, she has family coverage, so she can contribute the full $7,000 for 2019

Prorated example for comparison:

  • $3,500 single ÷ 12 = $291.67/month

  • $7,000 family ÷ 12 = $583.33/month

  • Suzy had 2 months single + 3 months family =
    (2 × $291.67) + (3 × $583.33) = $2,333.33

Using the last month rule, Suzy may contribute the full $7,000 instead of $2,333.33.

Testing Period Requirement

To use the last month rule, the account holder must remain HSA eligible for the entire following calendar year (the testing period).

  • In Suzy’s case, if she uses the rule in 2019, she must remain eligible through all of 2020

  • If she loses eligibility during 2020, any amount she contributed above the prorated amount ($2,333.33) becomes taxable

  • She must also pay a 10% penalty on the excess

Summary of Testing Period Rules

  • Applies when contributing more than the prorated amount using the last month rule

  • Must remain HSA-eligible through December 31st of the following year

  • Coverage can be self-only or family, as long as it’s HSA-qualified

  • Failure to meet the testing period =

    • Excess contribution becomes taxable income

    • Subject to a 10% excise tax