How Does Enrolling in an HDHP Mid-Year Impact Your HSA?

Changing life events in the middle of the year usually means changes to your health insurance plan. If an employee enrolls in a high-deductible health plan (HDHP) mid-year, how does that affect the amount they can contribute to their health savings account (HSA)?

How Enrolling in an HDHP Mid-Year Impacts an HSA

Normally at the beginning of the calendar year, individuals can choose how much they contribute to their HSA up to the contribution limit amount. However, if someone enrolls in a HDHP at a different time of the year—say, because of a job change in late July—they will need to prorate their contribution limit depending on when they join.

For example, if a new employee joins the team and enrolls in an individual, HSA-eligible HDHP plan in late July, then they can prorate their contribution limit to allow for 5 months of that year. Here is the calculation for that scenario in 2021:

1. The total annual contribution limit, divided by 12, multiplied by the number of months that the individual is qualified.
2. So for this example, it would be: 
• $3,600 (individual limit for 2021) / 12 = 300
• 300 x 5 = $1,500
3. Therefore, the individual in our example would be able to contribute $1,500 for 2021.

Additionally, individuals could be facing a different life change beyond employment that prompts them to prorate their HSA contribution limits. This includes transitioning to Medicare post-employment or enrolling mid-year in an individual Marketplace plan that is an HDHP and HSA-eligible after retiring earlier than 65 years old.

Defined: What is the Last-Month Rule?

Alternatively, instead of prorating their contribution limits, employees can contribute the full amount up to the normal contribution limit if the last-month rule applies. The last-month rule applies if you are eligible on an HDHP plan on the first day of the last month of the tax year. 

According to the IRS, “If contributions were made to your HSA based on you being an eligible individual for the entire year under the last-month rule, you must remain an eligible individual during the testing period. For the last-month rule, the testing period begins with the last month of your tax year and ends on the last day of the 12th month following that month (for example, December 1, 2020, through December 31, 2021).”

According to the IRS, if an individual fails the testing period, they will have to include the total contributions made to their HSA in income that wouldn’t have been made except for the last-month rule. Additionally, they will be subject to a 10% tax on that amount.

Therefore, employees who join an HDHP mid-year will have a decision to make. Going with the pro-rated option is a safe bet if you’re not sure whether your job will change, but your HSA contributions will be less. 

Going the second route is obviously a little more of a risk—but if you have medical procedures or expenses coming up that an HSA will help with financially, and you feel secure that your job situation won’t change, it could be worth it.

What If You Contribute Too Much to Your HSA?

If an employee contributes too much to their health savings account, they have to pay a 6% excise tax on the amount over the contribution limit. However, the IRS advises that an individual can withdraw some or all of the extra contributions to avoid the excise tax if they do the following:

• Withdraw the excess HSA contributions by the due date, including extensions, of their tax return for the year the contributions were made
• Withdraw any income earned on the withdrawn contributions and include the earnings in "Other income" on their tax return for the year that the employee withdraws the contributions and earnings

Reminder: What is an HSA and an HDHP?

A health savings account (HSA) is a personal bank account with significant tax advantages that can be used by an individual to pay for medical expenses, typically on high-deductible health insurance plans (HDHP). There’s a limit to the amount that a person or family can contribute to their HSA each year, as determined by the Internal Revenue Service (IRS). 

A high-deductible health insurance plan (HDHP) is a type of healthcare coverage that requires participants to spend more on up-front costs before the insurance company begins to contribute to covering expenses. In many cases, people with HDHPs spend less per month on premiums. Different types of healthcare coverages can be considered HDHPs. Additionally, HDHPs can be paired with HSAs to help users pay for qualified medical expenses using tax-advantaged dollars.

What are the Contribution Limits for 2022?

In May 2021, the IRS released 2022 cost-of-living adjusted limits for HSAs and HDHPs. These contribution caps include: