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Enrolling in an HDHP mid-year? Here’s how to bring your HSA into play

Finding yourself enrolling in an HDHP mid-year? You may be wondering: how does my health savings account (HSA) play into all of this? We’ve got you.

You’re probably familiar with the financial and tax advantages of a health savings account (HSA). And if that’s the case, you likely understand that in order to have an HSA, you must also be covered under a high-deductible health plan (HDHP). 

If all of this sounds familiar… you may also know that the IRS has limits on how much you can contribute to your HSA annually. In 2024, individuals can contribute a total of $4,150 to their HSA, and $8,300 for family.

But what if your HDHP coverage starts mid-year?

Maybe you’ve become self-employed well into the year and bought your own HDHP in the individual insurance market. Or perhaps your employer doesn’t offer an HDHP, but you switch jobs and your new employer does. Whatever the case may be, it’s not all that unlikely that you may one day find yourself enrolling in an HDHP mid-year… which could leave you wondering:

How much can I contribute my HSA?

In this situation, the IRS gives you two choices. 

  1. You can prorate your contribution based on the number of months you have coverage under an HDHP. 
  2. Or, as long as you’re eligible to contribute to an HSA as of December 1, you can put the full year’s contribution into your HSA. 

Here’s an Example

Say you’re a single person and you enroll in an HDHP as of October 1. You’re covered under the HSA-qualified plan for one-quarter of the year, which means you could prorate your HSA contributions and contribute up to $875 in 2019.

Or you could take the other option, and put the full $3,850 into your HSA (keep in mind that you have until the tax filing deadline to make your contributions, which gives you until mid-April of the following year).

So why wouldn’t everyone go with that second option? well, there’s a catch. It’s known as the HSA testing period.

If you put in more than the prorated amount, you have to continue to have HDHP coverage (and meet the rest of the requirements for contributing to an HSA) throughout the remainder of the year and the entire next year. 

You don’t have to contribute to an HSA during that following year, but you have to remain eligible to do so (and you can make contributions if you want to). 

If you don’t remain HSA-eligible in that following year, the IRS is going to go back and look at how much you contributed to your HSA during the year you enrolled. They’ll see how much you could have contributed using the prorated approach, and compare it with how much you actually contributed. And then they’ll charge you income tax plus a 10% penalty on the difference.

Weighing the Gamble

In some circumstances, you know for certain that you’re not going to remain HSA-eligible for the entire coming year (for instance, if you’re turning 65 and switching to Medicare). But even if you’re pretty sure you’ll stay HSA-eligible… life happens. Maybe you end up switching jobs, or an HDHP no longer makes sense for your reality (or bank account).

So if you’re enrolling in an HDHP mid-year and have the means to contribute more than the prorated amount to your HSA, be sure to look to the future.
Contributing as much as possible to your HSA is generally encouraged, but the testing period and your own future plans are important considerations as well.