What is the Last Month Rule?

Category: Health Savings Account and Health Insurance
What is the Last Month Rule?
Anonymous 08/20/2015

1 Answer(s)

If you become HSA-eligible during the year and are eligible as of December 1, you can follow normal pro-ration rules or take advantage of an exception called the Last Month Rule to make a full contribution for that tax year.   If you follow normal pro-ration, you take the number of months that you are HSA-eligible and divide that figure by twelve, then multiply by the statutory maximum annual contribution for that year. If you are under age fifty-five, enroll on a family contract, become HSA-eligible April 1, 2015, and remain HSA-eligible the remainder of the year, you can contribute 9/12 of $6,650 or $4,987.50.   Under the Last Month Rule, you can make a full contribution for the year ($6,650, given the facts above) if you are HSA-eligible as of December 1 and remain HSA-eligible through the end of the following calendar year.   In our example above, you need to remain HSA-eligible through December 31, 2016, to make the full contribution for 2015. If you fail to remain HSA-eligible through the testing period (which begins December 1, 2015, and extends through December 31, 2016, in the example above), you must include any contribution above the pro-rated amount in your taxable income and pay a 10% penalty.   Unlike a normal excess contribution, you do not have to remove the contribution from your account and the interest or other gain does not figure into the penalty.   Heres an illustration of the financial impact of losing HSA eligibility during the Last Month rule testing period.   Again, using the example above, you fail to renew your enrollment in an HSA-qualified plan April 1, 2016, after making a full $6,650 contribution for 2015. You must pro-rate your 2015 contribution ($6,650 that you contributed less the $4,987.50 pro-rated maximum equals an excess contribution of $1,662.50).   You then include the $1,662.50 excess contribution in your 2016 taxable income and pay a 10% penalty ($166.25). Your net loss is really just $166.25, because thats your only additional actual cost above what you would have paid in taxes had you pro-rated your contribution in the first place.
Vish Banthia 06/30/2016


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