Last Month Rule Coverage Gap During Testing Period

This question was submitted by HSA Edge reader Paul. Feel free to send in your question today to

What is the impact if I use the Last Month Rule and during the subsequent 12-month period I have a 1-month gap. Let’s say that I start my HSA on November 1st, then have Medicare in January, then have an HSA for the balance of the year. Do I have 10 months of excess contributions or one 1 because of January?

A condition of using the Last Month Rule is to abide by the Testing Period, which requires that you maintain HSA eligible coverage for the subsequent year. The Testing Period evaluates your status on the first day of each month; if you have HSA eligible coverage then you are considered covered by the HSA for that month.

If you had non HSA eligible coverage on the 1st of January you would fail the Testing Period. The result of this is any additional contribution from the prior year (above and beyond the 2 months you had coverage) is added back to income and taxed. Unfortunately, this occurs for the full (over) contribution amount, even if it was just 1 month missed in the Testing Period.

The penalty calculation is a bit tricky and if you need help, I recommend my site EasyForm8889.

Note: if you need help accounting for your HSA penalties from the Last Month Rule, please consider using my service to complete Form 8889. It asks simple questions in a straightforward way and will generate your HSA tax forms in 10 minutes. It is fast and painless, no matter how complicated your HSA situation. - complete HSA Form 8889 in 10 minutes!