When an HSA owner has a change of status during the plan year, it affects his or her annual Health Savings Account (HSA) contribution limit. The following provides a regulatory overview (with some examples) of how a mid-year change of status affects HSA contribution limits.
When a person with a qualified high deductible health plan signs up for an HSA, they’re looking to take advantage of pre-tax contributions, tax-free distributions for eligible health expenses, and the ability to invest the funds and grow their balance tax-free.
During 2018, a person with individual coverage can contribute up to $3,450 to their HSA, while those with family coverage may contribute up to $6,850. When possible, account owners should make the maximum annual contributions and take advantage of the tax savings and the ability to rollover unused funds at the end of the year.
With an HSA, account owners have the ability to change their planned annual contribution amount at any time during the plan year. However, one question that puzzles many account owners is what happens when you have a change in status, from individual coverage to family coverage, or vice versa. Whether you have an HSA through your employer or established one through another institution, you may not make changes that would cause your total contributions for the year to exceed the maximum annual limits.
How a Change of Status Affects Annual HSA Contribution Limits
One significant 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. Common reasons for changing status include:
Individual Status to Family
- Getting married
- Birth of a child
- Your spouse loses his or her individual health care coverage
- Unexpected increase in health care costs for a family member
- Becoming legally responsible for the care of elderly parents
Family Status to Individual
- Death of a spouse
- Grown children moving out of the house
Changing your status is a relatively simple administrative process. However, it’s important to know that changing your status during the plan year affects your annual contribution limit. The following regulatory 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. Under 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 two options results in the highest amount:
- 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,
- 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.
From Family to Self-Only Coverage
For example, John Smith has family coverage for the 2018 plan year and plans to contribute the maximum $6,850 to his HSA. However, starting in July, he switches to self-only coverage, which has a $3,450 annual contribution limit.
Under the Full-Contribution Rule, John Smith’s new contribution limit for 2018 comes out to $5,150, referred to as Option 1 above. For January through June, he could contribute $6,850 (annually), but from July through December, he could only contribute $3,450 (annually). Under option 1, his new rate is $5,150, 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 just $3,450. However, the ‘greater of’ provision allows him the higher amount of $5,150.
See the chart below.
|Month||2018 Annual Contribution Limit Based on Coverage Level|
|Total for all months||$61,800|
|Annual Limitation (Divide the total by 12)||$5,150|
From Self-Only to Family Coverage
This change is much easier to calculate. John starts with individual coverage, but switches to family coverage as of July 1. Option A would result in an annual limit of $5,150, but option B would result in an annual limit of $6,850. Under the “greater of” provision of the Full-Contribution Rule, John may contribute the full $6,850 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.