The maximum amount an eligible individual can contribute to an HSA each year depends on the tier in which the individual is enrolled. The IRS uses two tiers: single and family (which includes any other than self-only coverage). Although the contribution maximum is an annual amount, HSA eligibility is determined on a monthly basis and thus the contribution limit is prorated if an individual experiences a change in tiers during the year.
The maximum amount is based on the enrollment tier as of the first day of each calendar month. If an individual is enrolled in single coverage for some months and family coverage (again, anything other than self-only) for other months, the maximum for the year would be prorated based on the number of months enrolled in each tier. This is known as the monthly contribution rule.
For example, if an employee is enrolled in self-only coverage January through March and enrolls in employee plus spouse (considered family coverage under HSA rules) for the remainder of the year, the employee would be eligible to contribute 3/12 of the single annual contribution maximum plus 9/12 of the family contribution maximum.
There is also the full-contribution rule, or last-month rule, that would allow the employee to make the full year’s HSA maximum contribution based on the tier in which they are enrolled as of December 1 instead of having to prorate the maximum amount. This rule applies if the individual is HSA-eligible on December 1 and remains HSA-eligible for the entirety of the following calendar year. Using the example above, because the employee enrolled in family coverage as of December 1, they can make the full year contribution at the family maximum instead of having to prorate based on tier, as long as they remain HSA-eligible for the entire next calendar year. Individuals using the full contribution rule should be careful, because if they do not remain HSA-eligible in a family tier the entire next calendar year, any amount exceeding the prorated amount from the prior year would be subject to income tax and an additional 10% excise tax.
For further information on both the monthly contribution rule and the full contribution rule, please ask your broker or consultant for a copy of the NFP publication Health Savings Accounts: A Guide for Employers.