When a Health Savings Account (HSA) owner has a change of status during the year, it affects how much he or she can contribute to their HSA. Learn how a mid-year change of status affects HSA contribution limits below.
When a person with a qualified High Deductible Health Plan signs up for an HSA, the account comes with a ton of advantages. Account owners can enjoy pre-tax contributions, tax-free distributions for eligible health expenses (for themselves and their dependents), and the ability grow their balance through interest and investments tax-free. You can also use your HSA like a retirement account after age 65. It’s no wonder these accounts are so popular!
With an HSA, account owners can change their annual contribution amount at any time during the plan year for any reason. However, one question that puzzles many account owners is “what happens when you have a change in status?” When you go from individual coverage to family coverage, or vice versa, your HSA contribution limits could be adjusted.
How a Change of Status Affects Annual HSA Contribution Limits
One major advantage of the flexibility afforded by HSAs is the ability to change status during the plan year. For example, individuals can change to family status and vice versa in order to adjust to recent changes in life circumstances.
Regardless of the reason for altering your contributions, you may not make changes that would cause your total contributions for the year to go over the maximum annual limits. Common reasons for status changes include:
Changing from Individual Status to Family
- Getting married
- Birth or adoption of a child
- Spouse loses his or her individual healthcare coverage
- Unexpected increase in healthcare costs for yourself or a dependent
- Becoming legally responsible for the care of elderly parents
Changing from Family Status to Individual
- Divorce
- Death of a spouse or child dependent
- Grown children moving out of the house
Updating your status is a relatively simple process. However, it’s important to know that modifying your status during the plan year affects your annual contribution limit. The following overview provides examples of how a mid-year change of status affects HSA contribution limits.
Full Contribution Rule
Under IRS Notice 2008-52 (published in IRB 2008-25, page 1166) – also known as the Full-Contribution Rule – the annual contribution limit for an HSA can increase — but not decrease — due to a change in status.
Per the “greater of” provision of the Full-Contribution rule, an HSA-eligible individual who has a mid-year status change will have his new annual contribution limit determined by whichever of the following options results in the highest amount:
Option 1: The maximum annual contribution limit based on his or her actual HDHP coverage (individual or family) for each month of the tax year, calculated monthly, combined and then divided by 12; or,
Option 2: The maximum annual contribution limit for the tax year based on his or her actual HDHP coverage (individual or family) as of December 1 of that year.
See examples below of both options.
NOTE: During 2022, a person with individual coverage can contribute up to $3,650 to their HSA; those with family coverage may contribute up to $7,300.
From Family to Self-Only Coverage
For example, John Smith has family coverage for the 2022 plan year and plans to contribute the maximum $7,300 to his HSA. However, starting in July, he switches to self-only coverage, which has a $3,650 annual contribution limit.
Under the Full-Contribution Rule, John Smith’s new contribution limit for 2022 comes out to $5,475 (see Option 1). The new rate is determined off the average for the two periods (6 months of family coverage, 6 months of self-only coverage). Under option 2, his new rate would be $3,650. However, the ‘greater of’ provision allows him the higher amount of $5,475.
See the example chart below.
| Month | 2021 Annual Contribution Limit Based on Coverage Level |
| January | $7,300 (family) |
| February | $7,300 (family) |
| March | $7,300 (family) |
| April | $7,300 (family) |
| May | $7,300 (family) |
| June | $7,300 (family) |
| July | $3,650 (change to individual) |
| August | $3,650 (change to individual) |
| September | $3,650 (change to individual) |
| October | $3,650 (change to individual) |
| November | $3,650 (change to individual) |
| December | $3,650 (change to individual) |
| Total for all months | $65,700 |
| Annual Limitation (Divide the total by 12) | $5,475 |
From Self-Only to Family Coverage
This change is much easier to calculate. John starts with individual coverage, but later switches to family coverage as of July 1. Option 1 would result in an annual limit of $5,475, but option 2 would result in an annual limit of $7,300. Under the “greater of” provision of the Full-Contribution Rule, John may contribute the full $7,300 for that year.
While complex, it is important that people with a mid-year change of status understand how it affects their annual HSA contribution limit. Refer to IRS Notice 2008-52, 2008-25 I.R.B. 1166 for more information.
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