Did you know that mid-year coverage changes can affect the Health Savings Account (HSA) account owner’s annual contribution limit? The following provides an overview of regulations, plus examples of how the changes are calculated.
If you own an HSA, you can change your contribution amount at any time during the plan year, subject to the annual limit. (Annual contribution limits are set by the IRS each year.) However, your annual limit will change if you switch mid-plan-year from individual HDHP coverage to family HDHP coverage or vice versa. Here’s how to calculate the contribution limit change.
Status Changes and 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 coverage status. The rule provides that an HSA-eligible individual experiencing a mid-year coverage change will have the new annual contribution limit determined by whichever of the following two options results in the highest amount:
- Option 1: The annual contribution limit is based on actual HDHP coverage (individual or family) for each month of the tax year, calculated monthly, added together, and then divided by 12 to determine the annual limit.
- Option 2: The maximum annual contribution limit for the entire tax year is based on actual HDHP coverage (individual or family) as of December 1.
See examples below of both options.
Family to Individual Coverage Status Change
John Smith has family coverage for the 2024 plan year and will contribute the $8,300 maximum to his HSA. However, starting in July, he switches to individual coverage, with a $4,150 annual contribution limit. Under the Full Contribution Rule, Smith’s new annual contribution limit for 2024 is $6,225.
Here’s why: under Option 1, averaging six months of Family coverage and six months of Individual coverage creates an annual limit of $6,225. Under Option 2, the limit would be just $4,150 because he had Individual coverage as of December 1. The ‘greater of’ provision of the Full Contribution Rule allows him the higher amount of $6,225 for that plan year. See the chart below.
| Month | Coverage Level | Annual Contribution |
| January | Family | $8,300 |
| February | Family | $8,300 |
| March | Family | $8,300 |
| April | Family | $8,300 |
| May | Family | $8,300 |
| June | Family | $8,300 |
| July | Individual | $4,150 |
| August | Individual | $4,150 |
| September | Individual | $4,150 |
| October | Individual | $4,150 |
| November | Individual | $4,150 |
| December | Individual | $4,150 |
| Total for all 12 months | $74,700 | |
| Annual Limitation (Divide Total by 12) | $6,225 |
Individual to Family Coverage Status Change
John starts with Individual coverage but switches to Family coverage as of September 1. Option 1 would result in an annual limit of $5,533, but Option 2 would result in an annual limit of $8,300 because he had Family coverage on December 1. The ‘greater of’ provision of the Full Contribution Rule allows him the higher amount of $8,300 for that plan year.
Failing to understand how a mid-year change in coverage affects your annual contribution limit can result in accidental excess HSA contributions or a lost opportunity to contribute a higher amount. Refer to IRS Notice 2008-52, published in IRB 2008-25, page 1166, or your qualified benefits counsel for more information.
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