Can I Increase My HSA Contribution Mid-Year?

Health Savings Accounts (HSAs) offer a tax-advantaged way to save for medical expenses, making them an appealing option for many individuals. Understanding how to adjust HSA contributions, especially mid-year, is key to maximizing their benefits.

Employer Plan Enrollment Windows

HSA contributions are often tied to employer plan enrollment windows, which typically align with the annual open enrollment period. During this time, employees can adjust their contributions for the upcoming year, helping them plan for medical expenses and optimize tax advantages.

Outside of open enrollment, changes to HSA contributions are permitted if a qualifying life event occurs, such as marriage, the birth or adoption of a child, or a significant change in employment status. These events trigger a special enrollment period, allowing employees to adapt their contributions to address new circumstances.

Employers play a crucial role in ensuring employees are informed about these enrollment windows. Providing resources like informational sessions or online tools can help employees make well-informed decisions about their HSA contributions.

Qualifying HDHP Requirements

To contribute to an HSA, individuals must be covered by a High Deductible Health Plan (HDHP) meeting IRS criteria. In 2024, an HDHP must have a minimum deductible of $1,600 for self-only coverage and $3,200 for family coverage, with maximum out-of-pocket expenses capped at $8,050 for self-only coverage and $16,100 for family coverage. These thresholds are adjusted annually for inflation.

HDHP coverage also determines HSA contribution limits. For 2024, individuals can contribute up to $4,150 for self-only coverage and $8,300 for family coverage. Those aged 55 and older are eligible for an additional $1,000 catch-up contribution. Staying within these limits ensures compliance with IRS regulations and maximizes the benefits of an HSA.

Partial-Year Coverage Adjustments

When HDHP coverage applies for only part of the year, IRS rules dictate prorated HSA contribution limits based on the number of months of eligibility. For example, six months of HDHP coverage in 2024 allows contributions of $2,075 for self-only coverage or $4,150 for family coverage.

The Last-Month Rule permits individuals who are HDHP-eligible on December 1st to contribute the full annual limit, regardless of how many months they were eligible earlier in the year. However, maintaining HDHP coverage through the end of the following year is required. Failure to do so results in excess contributions being taxed as income and subject to a 10% penalty.

Coordination with Payroll Contributions

Coordinating HSA contributions through payroll requires attention to timing and communication. Many employers offer payroll deductions, enabling employees to allocate pre-tax income directly to their HSA, improving tax efficiency.

Employees must notify their payroll department of any desired changes to contribution amounts, adhering to company policies and payroll cycle deadlines. For mid-year adjustments, timely communication ensures the changes take effect in the next payroll period.

Tax Filing Factors

Mid-year HSA contribution adjustments have tax implications that require careful consideration to avoid penalties. Payroll contributions are reported on Form W-2, Box 12, using code W, and are excluded from taxable income. Contributions made directly to the HSA must be reported on Form 8889 when filing taxes.

Exceeding the annual contribution limit triggers a 6% excise tax on the excess amount each year it remains in the account. To avoid this, individuals can withdraw excess contributions before the tax filing deadline, including extensions, while also removing any earnings attributable to the excess, which are taxable.

For those utilizing the Last-Month Rule, the associated testing period must be accounted for when filing taxes. If HDHP coverage is not maintained for the entire testing period, contributions exceeding the prorated amount for months of eligibility will be taxed as income and incur a 10% penalty. Consulting a tax professional or reviewing IRS resources can help ensure accurate reporting and compliance.