The Impact of a Mid-Year Change of Status on HSA Contribution Limits

Mid-year status changeDid you know that a change of status during the plan year affects the account holder’s annual Health Savings Account (HSA) contribution limit? The following provides an overview of regulations plus examples of how the changes to contribution limits are calculated.

If you have an HSA, you are probably aware that you can change your contribution amount at any time during the plan year, subject to the annual limit. Annual HSA contribution limits for 2017 are $3,400 for individual coverage and $6,750 for family coverage (learn more).

You may not be aware, however, that your annual limit changes when you experience a mid-plan-year change in status, from individual coverage to family coverage, or vice versa. Here’s how to calculate the changes.

How a Change of Status Affects Annual HSA Contribution Limits

Full Contribution Rule

Under the “Full Contribution Rule” (IRS Notice 2008-52, published in IRB 2008-25, page 1166), the annual contribution limit for an HSA can increase, but not decrease, due to a change in status. The rule provides that an HSA-eligible individual experiencing a mid-year status change will have his or her new annual contribution limit determined by whichever of the following two options results in the highest amount:

  • The annual contribution limit based on actual HDHP coverage (individual or family) for each month of the tax year, calculated monthly, combined and then divided by 12 to determine the monthly average; or,
  • The maximum annual contribution limit for the tax year based on actual HDHP coverage (individual or family) as of December 1.

See examples below of both options.

Example: From Family to Individual Coverage

John Smith has family coverage for the 2017 plan year and is planning to contribute the $6,750 maximum to his HSA. However, starting in September, he switches to individual coverage, which has a $3,400 annual contribution limit. Under the Full Contribution Rule, Smith’s new annual contribution limit for 2017 is $5,633.

Here’s why: under option 1, combining eight months of Family coverage and four months of Individual coverage equals an average monthly limit of $5,633. Under option 2, his new rate would be just $3,400 because he had Individual coverage as of December 1. The ‘greater of’ provision of the Full Contribution Rule allows him the higher amount of $5,633 for that plan year. See the chart below.

Month Annual Limit Based on Coverage Level
January $6,750
February $6,750
March $6,750
April $6,750
May $6,750
June $6,750
July $6,750
August $6,750
September $3,400
October $3,400
November $3,400
December $3,400
Total for all 12 months $67,600
Annual Limitation (Divide Total by 12) $5,633

Example: From Individual to Family Coverage

This is much easier to calculate. John starts with individual coverage, but switches to family coverage as of September 1. Option A would result in an annual limit of $5,633, but option B would result in an annual limit of $6,750. The ‘greater of’ provision of the Full Contribution Rule allows him the higher amount of $6,750 for that plan year

Failing to understand how a mid-year change of status affects your annual HSA contribution limit can result in either accidental excess contributions or, conversely, lost opportunity to contribute a higher amount. Refer IRS Notice 2008-52, published in IRB 2008-25, page 1166, for more information.