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Understanding How Changing from Individual to Family Coverage Affects Your HSA Contributions

Family coverage and HSA contributions

If your status changes during the plan year, it can affect how much you can contribute to your Health Savings Account (HSA) for that year. Learn how a person’s HSA contribution limits can change due to a mid-year change of status.

As an HSA owner, you probably know that you can change how much you contribute (up to the annual limit) at any time during the plan year. However, if you have a life-changing event which permits you to switch from individual coverage to family coverage (or vice versa), your HSA annual contribution limit could be affected.

What qualifies as a change of status?

It’s important to remember that with an HSA, you can only contribute if you’re enrolled in a qualified high deductible health plan (HDHP). Events that qualify for a change of status include:

  • Marriage
  • Divorce
  • Birth of a child/adoption
  • Employment status
  • Change in participant eligibility
  • Medicare or Medicaid eligibility

Learn more about a change of status.

The “Greater of” Rule

Let’s talk about the “greater of” (or full-contribution) rule, posted in IRS Notice 2008-52, 2008-25 I.R.B. 1166. This rule dictates how the HSA owner can figure out what the new contribution limit is when he or she has a change mid-year.

Under the full-contribution rule, if the HSA owner is an HSA-eligible individual for the entire taxable year, but changes his/her HDHP coverage during that year (i.e., from individual HDHP coverage to family HDHP coverage), then s/he may contribute up to the greater of:

  1. The maximum amount that may be contributed for the taxable year, based upon actual HDHP coverage (i.e., self-only or family HDHP coverage) for each month of the year; or
  2. The full HSA contribution limit for the taxable year based on the type of HDHP coverage that the individual had on December 1st of that year (i.e., on December 1, 2018, the person had $3,500 for self-only HDHP coverage, or $7,000 for family HDHP coverage) To better understand this, let’s break it down into two scenarios.

From Individual to Family Coverage

Let’s start with switching from individual coverage to family coverage. This situation is very straightforward. For example, Linda Lou starts with individual coverage, but switches to family coverage as of August 1. Based on the options above, option 1 would result in an annual limit of $5541.66, while option 2 would result in an annual limit of $7,000. Under the “greater of” provision of the Full-Contribution Rule, Linda can contribute the full $7,000 for that year. See the chart below:

    Months in 2019 Amount from Limitation Chart (see Form 8889 instructions)
January $7,000
February $7,000
March $7,000
April $7,000
May $7,000
June $7,000
July $7,000
August $3,500
September $3,500
October $3,500
November $3,500
December $3,500
Total for all months $66,500
Limitation.  Divide the total by 12. $5541.66

From Family to Individual Coverage

If Linda Lou changes from family coverage to individual coverage, there’s a little more work involved.  Initially, Linda starts with family coverage for the plan year and can contribute a maximum of $7,000. However, in August, she switches to individual coverage.

For January through July, she was able to contribute $7,000 annually. Then, after the changing status in August, her annual contribution rate dropped to $3,500. To calculate the prorated amount, her new annual rate is determined off the average for these two periods (7 months of family coverage; 5 months of individual coverage).

Her new annual rate for that plan year would be $5541.66 because it is greater than the annual individual contribution limit of $3,500. Starting the following year, Linda Lou would have individual coverage which would determine her contribution limit as determined by the IRS.

With HSAs being such a great tool for flexible healthcare spending (and for retirement), it’s important to understand how your life changes can affect your contributions.

Refer to IRS Notice 2008-52, 2008-25 I.R.B. 1166 for more information.

Have more HSA questions? Learn more in these HSA FAQs.