Not Using the Last Month Rule when Coverage Changes

This question was submitted by HSAedge reader Kevin. Feel free to submit your question today to

I have an additional question/scenario regarding the Last Month Rule I was hoping you could help with. My wife and I began a HSA-eligible policy August 1 of this year. On January 1, we will switch to an Obamacare plan that is not HSA eligible. I assume that we would NOT be eligible to make HSA contributions in 2017 under this plan. If so, does that mean we are ALSO not able to make contributions in 2016 (without failing testing period and paying penalty)?

If I understand you correctly, you have HSA eligible coverage from Aug through Dec of 2016. On January 1st 2017 you are switching to a new plan that is HSA eligible but ACA modifications make it de facto HSA ineligible.

If that is true, you can definitely still contribute to your HSA for 2016 but on a pro rata basis, i.e. proportionate for the months you had coverage. By my count that is 5/12 months so your 2016 contribution limits would be:

  • Single coverage = 5/12 * $3,350 = $1,395.83
  • Family coverage = 5/12 * $6,750 = $2,812.50
  • If you are 55 or older add 5/12 * $1,000 = $416.67 to above amounts

The key point is that you can always contribute to your HSA for times that you had HSA eligible coverage, full stop. You then have the decision of whether to use the Last Month Rule or not, so it is optional. Using it allows you to contribute the full year’s HSA contribution limit (e.g. $3,350 or $6,750 above) regardless of actual time covered. Not using it -and this is what trips people up- reverts to the default, which is a contribution limit determined by the number of months coverage. No one is forced into using the Last Month Rule, and doing so can be detrimental, since as you note the Testing Period comes into play along with the risk of penalty.

So in your situation, with an upcoming coverage change that would fail the Testing Period, it is definitely best to avoid using the Last Month Rule.