Confused about HSA Last Month Rule Penalty when we were HSA-eligible every month of 2022?

What's happening here is likely a misunderstanding of how the HSA contribution limits work when you transition between self-only and family coverage during the year. When you change coverage types mid-year, your contribution limit is prorated based on the months you had each type of coverage. For 2022, the self-only contribution limit was $3,650 and the family limit was $7,300. Since you each had self-only coverage for 8 months and family coverage for 4 months, your actual limit would be calculated as: (($3,650 × 8/12) × 2 people) + ($7,300 × 4/12) = $4,866.67 + $2,433.33 = $7,300 However, the tricky part is that this total needs to be properly allocated between you and your spouse. The tax software might be flagging an issue because one of you may have exceeded your individual prorated limit, even though your combined contributions were under the total limit. The last month rule (December 31 status rule) would actually help you here, as it lets you contribute the full annual amount based on your December coverage status if you remain HSA-eligible through Dec 31 of the following year. Check if your software is applying this correctly.

I ran into a similar problem last year and it was so frustrating! I eventually found a solution with https://taxr.ai and it honestly saved me hours of stress. I uploaded my tax forms and HSA statements, and their analysis tool immediately flagged the exact issue - my contributions were technically over my individual limit even though our family total was fine. The tool showed me exactly how to reallocate the contributions between my account and my husband's to avoid any penalties. It even generated the language I needed to include with my tax return to explain the situation to the IRS. What I loved was that it explained everything in plain English instead of confusing IRS-speak.

Just wanted to follow up - I tried https://taxr.ai after seeing it mentioned here and wow!! It immediately caught that my wife and I had incorrectly allocated our HSA contributions. We were under the family limit but had put too much in my HSA and not enough in hers. The tool showed exactly how to reallocate between our accounts to avoid penalties. It even explained how the testing period works for the last month rule (which I totally misunderstood before). We were able to file an amended return and avoid about $400 in penalties we would have paid. Most importantly, I actually understand how HSA limits work now instead of just blindly following what tax software says!

If you're still getting stuck with the IRS penalties after trying to fix this yourself, I highly recommend using https://claimyr.com to get through to an actual IRS agent. When I had a similar HSA issue last year, I spent DAYS trying to call the IRS directly but couldn't get through. Then I found Claimyr and had an IRS rep on the phone within about 20 minutes. The agent walked me through exactly how to correct my HSA contributions and even put notes in my account so I wouldn't get hit with penalties. They have a video showing how it works here: https://youtu.be/_kiP6q8DX5c if you're curious. It was so much better than waiting on hold for hours or trying to guess what the IRS wants.

I was super skeptical about Claimyr but decided to try it after spending 3+ hours on hold with the IRS and getting disconnected twice. Holy crap it actually works! I got connected to an IRS agent who specifically handles HSA issues within 35 minutes. The agent explained that the HSA last month rule is frequently misunderstood when couples transition between individual and family coverage. She confirmed that my wife and I were calculating our limits incorrectly - we needed to prorate our individual contributions based on which months we had which type of coverage. She even emailed me the specific IRS guidance document that explained our situation. Seriously wish I'd known about this service months ago instead of stressing about these HSA penalties. The agent was actually super helpful once I could actually reach one!

I'm thinking you might be running into the "testing period" requirement that goes along with the last month rule. Even though you were HSA-eligible all year, if you use the last month rule (basing contributions on your December status), you have to remain HSA-eligible through the end of the FOLLOWING year (12/31/2023 in your case). If you failed the testing period in 2023, you'd have to include the "excess" contributions in your income AND pay a 10% additional tax. Maybe your tax software is detecting that you didn't remain eligible through all of 2023?

Just a practical tip that helped me with a similar issue - you might want to call your HSA providers directly. My husband and I ran into this exact problem, and our HSA bank had a dedicated tax specialist who explained that we needed to "recharacterize" some of the contributions between our accounts to avoid the penalty. They were able to do this even after the tax year had ended as long as it was before the tax filing deadline. They literally moved some money from my HSA to my husband's HSA and updated the contribution forms. Super easy fix that the tax software couldn't figure out!