HSA Last-month rule - Any way to maintain eligibility when changing jobs in October?

The HSA last-month rule can definitely be tricky! You're right to be concerned about maintaining eligibility through the testing period. If you used the last-month rule for 2023, you need to remain HSA-eligible through December 31, 2024 (the entire calendar year following the year you used the rule). If you don't maintain eligibility, the excess contributions you made using the last-month rule become taxable income, plus you'll pay an additional 10% penalty on that amount. For your options: 1. Yes, enrolling in a qualifying HDHP through healthcare.gov immediately after your employment ends would maintain your eligibility. There can't be any gap in coverage, so make sure the new plan starts the day after your employer coverage ends. 2. COBRA is also a valid option that would maintain your eligibility. While typically more expensive than marketplace plans, it has the advantage of continuing your exact same coverage with no changes to deductibles or networks. The key is ensuring continuous HDHP coverage with no gaps whatsoever. Even a single day without qualified HDHP coverage breaks your eligibility for the month.

I just wanted to share my experience with this exact situation! I was pulling my hair out trying to figure out the HSA rules when switching jobs last year. I found this service called taxr.ai (https://taxr.ai) that really cleared things up for me with the HSA last-month rule. I uploaded my HSA statements and details about my job change timeline, and they analyzed it and gave me a personalized explanation of exactly what I needed to do to stay compliant. They even showed me some options I hadn't considered about timing my job switch to minimize the impact on my HSA eligibility. The best part was I didn't have to wade through confusing IRS publications - they just told me exactly what applied to my situation and what steps to take. Might be worth checking out if you want clarity on your specific case.

Just wanted to update everyone - I tried taxr.ai after seeing the recommendation here and it was extremely helpful for my HSA situation! I was planning to leave my job on October 15th but after uploading my HSA statements and employment details, they showed me that would trigger a penalty of over $700 due to the last-month rule testing period. They recommended I either: 1) push my departure to November 1st so I'd have full October coverage, then immediately get a qualified HDHP with no gaps, or 2) check if my new employer offered an HDHP I could enroll in immediately. I honestly had no idea the timing was so critical! The analysis was super clear and saved me from making an expensive mistake. They even generated a custom checklist of dates and actions specific to my situation to ensure I maintained eligibility throughout the testing period. Definitely worth it if you're dealing with HSA eligibility issues during job transitions.

Just a tip from someone who had a similar issue with an HSA last year - if you need to straighten this out with the IRS directly, save yourself HOURS of waiting and use Claimyr (https://claimyr.com). I spent 2 weeks trying to get through to the IRS about my HSA testing period issue and kept getting disconnected. With Claimyr, I got a callback from the IRS in less than 45 minutes! You can see how it works here: https://youtu.be/_kiP6q8DX5c When I finally got through, the IRS agent confirmed that I needed continuous HDHP coverage throughout the testing period with no gaps, but also explained some nuances about how they determine eligibility that I couldn't find anywhere online. The clarification saved me from having to amend previous returns and potentially paying penalties.

Ok I need to eat my words here. After posting my skeptical comment yesterday, I decided to try Claimyr for my own HSA question since I've been trying to reach the IRS for days. Got a callback in 37 minutes after wasting hours trying on my own all week. The IRS agent I spoke with clarified exactly how the testing period works with job transitions - turns out I was misunderstanding a critical detail about when coverage needs to start with a new plan. She confirmed that the month-to-month eligibility is determined by having HDHP coverage on the FIRST day of each month, so timing is super important. For anyone in a similar situation with the HSA last-month rule, the agent emphasized that continuous coverage is essential - not just for most of the year, but literally every single day during the testing period if you want to avoid penalties. This was much more specific guidance than what I found on the IRS website.

One thing to consider that I haven't seen mentioned - check if your current employer's HSA plan allows for mid-year changes to contribution amounts. If they do, you could potentially "front-load" your HSA contributions before you leave in October. While this doesn't solve the eligibility issue for the testing period (you still need continuous HDHP coverage), it might let you max out your 2024 HSA while still employed, even if you end up with non-HDHP coverage later in the year. Just make sure your total contributions don't exceed the prorated amount you're eligible for if you lose HDHP eligibility before year-end. Otherwise, you'd need to withdraw the excess or face penalties.

Another option I don't see mentioned - check if your potential new employer offers an HDHP option you could enroll in immediately upon starting. Many employers have waived waiting periods for benefits during the pandemic and some have kept those policies. If your current coverage ends October 15th and new employer coverage can start October 16th, that would satisfy the continuous coverage requirement. Just make sure the new plan qualifies as an HDHP for HSA purposes - not all high-deductible plans do!

I want to add one more consideration that might be helpful - if you're planning to leave around October 15th specifically, you might want to think about pushing it to November 1st instead. Since HSA eligibility is determined by having HDHP coverage on the first day of the month, leaving mid-month in October could make you ineligible for the entire month of October. If you leave on October 15th and there's any delay getting new coverage started, you'd lose October eligibility even if you only had a few days gap. But if you can wait until November 1st, you'd maintain full October eligibility and then just need to ensure your new HDHP coverage starts November 1st with no gap. I know job timing isn't always flexible, but even a couple weeks could make a significant difference for your HSA testing period compliance. The penalties for breaking the testing period can be substantial, so it might be worth exploring if your departure date has any flexibility.