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HSA Last Month Rule Question

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  • HSA Last Month Rule Question

    I am in a year one year fellowship and started an HSA with my fellowship employer on July 1, 2021. I finish the fellowship on June 30, 2022 and start a new attending job elsewhere in September. Presuming I use COBRA to stay on my current HSA eligible insurance for those two months between the end of fellowship and the start of my new job, can I use the HSA Last Month rule to maximize my contribution ($3600)? Up to now, my contributions have been made on a pro-rated basis and so without an extra contribution I would only have made an $1800 contribution for 2021. Alternatively, if I obtain HSA eligible health insurance on the marketplace for July and August 2022, would I still be able to use the Last Month rule for 2021?

  • #2
    The question isn't if you can, but if you should. If you are an HSA eligible individual on 12/1, you can and are automatically deemed to have used the last month rule if making > your prorated maximum contribution.

    You must remain an HSA eligible individual for all of the following year. If not, the amount > the prorated amount must be included in income and subject to a 10% penalty, but remains in the HSA account.

    However, you may still want to do it if your fellowship causes your SS wages to be < the SS maximum taxable earnings ($142,800). While you lose one leg (tax deduction) of the HSA triple tax benefit. You retain the other two, FICA tax exempt and tax-free withdrawal for qualified medical expenses.

    You pay 10% - 7.65% = 2.35% to effectively make Roth-like contributions. On balance at lower marginal tax rates, it is still a good deal.


    • #3
      I think my wages next year will be around $150-160k. Does that mean I shouldn't do it?


      • #4
        I wouldn't right now.

        While HSA contributions under the last month rule will be exempt from the Medicare component of FICA (1.45%). You will still have a 10% - 1.45% = 8.55% net effective penalty.

        I would just contribute your prorated shares in 2021 and 2022. You have until your tax filing deadline (04/18/22) to take advantage of the last month rule for 2021.

        Possibly, you will know by then if you will have an HDHP plan in your new employment.


        • #5
          My new employment has an HDHP plan, but the question is will I maintain eligibility if I do COBRA for July and August 2021?


          • #6
            Ahh, important missing information.

            It doesn't matter whether you obtain HDHP coverage from an employer, thru COBRA or directly from an insurance company. All that matters for the testing period is that you have HDHP coverage on the 1st of every month for the entire following year.