When a person 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.
Most HSA owners are aware that they can 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.
During 2017, a person with individual coverage can contribute a maximum of $3,400 to their HSA, while those with family coverage may contribute up to $6,750. When a person’s status changes, their annual contribution limit changes as well. Here’s how to calculate the amount.
How a Change of Status Affects Annual 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 2017 plan year and plans to contribute the maximum $6,750 to his HSA. However, starting in July, he switches to self-only coverage, which has a $3,400 annual contribution limit.
Under the Full-Contribution Rule, John Smith’s new contribution limit for 2017 comes out to $5,075, referred to as Option 1 above. For January through June, he could contribute $6,750 (annually), but from July through December, he could only contribute $3,400 (annually). Under option 1, his new rate is $5,075, 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 $3,400. However, the ‘greater of’ provision allows him the higher amount of $5,075.
See the chart below.
|Month||2017 Annual Contribution Limit Based on Coverage Level|
|Total for all months||$60,900|
|Annual Limitation (Divide the total by 12)||$5,075|
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 $5,075, but option B would result in an annual limit of $6,750. Under the “greater of” provision of the Full-Contribution Rule, John may contribute the full $6,750 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.