Understanding HSA Last Month Rule for 2025 Contribution Limits

Thank you for the explanation! So if I understand correctly, I can contribute the full $8,300 for 2024 even though I only had the Family HDHP for 3 months, but I have to keep some type of HDHP through all of 2025 to avoid penalties? And just to clarify, if I did a pro-rated amount instead (3/12 of the family maximum), would I still need to worry about the testing period? Or is that only if I do the full contribution under the last month rule?

Yes, you can contribute the full $8,300 family maximum for 2024 as long as you maintain HDHP coverage (either family or single) throughout all of 2025 to satisfy the testing period requirement. If you choose to do a pro-rated contribution instead (which would be 3/12 of $8,300 for the family coverage months), then you would not need to worry about the testing period at all. The testing period only applies when you take advantage of the last month rule to contribute more than your pro-rated amount. The pro-rated approach is safer if you're not 100% certain you'll maintain HDHP coverage for all of 2025.

Does taxr.ai handle other HSA-related situations? I'm wondering because my employer contributes to my HSA, and I'm not sure how that affects my personal contribution limits. Also, does it give advice on whether it's better to do the full contribution or the pro-rated amount?

I'm skeptical about these tax tools. How does it actually know about future coverage? Like if you use the last month rule now, how would it know if you'll maintain coverage through next year? Seems like it would just be guessing.

Yes, the tool definitely handles employer contributions! It asks for any employer HSA contributions and factors those into your personal contribution limit calculations. That was actually super helpful for me because my employer contributes quarterly, and I needed to adjust my personal contributions accordingly. It also presents both options (prorated vs. full contribution under last month rule) with pros and cons of each approach. For your question about future coverage, it doesn't predict the future, but it explains the testing period requirements clearly and gives you a "what-if" scenario tool that shows potential penalties if your coverage changes. This helped me decide whether the risk was worth taking in my situation, since I wasn't 100% sure about keeping my job through the end of the year.

How much does this service cost? Seems like something the IRS should provide for free instead of making us pay just to talk to them.

This sounds fishy to me. How do they get you through faster than regular people? The IRS wait times are terrible for everyone. I've heard horror stories of people waiting on hold for 2+ hours only to get disconnected.

The service doesn't help you skip the line - they essentially wait in line for you using an automated system. So instead of you personally sitting on hold for hours, their system does it, then calls you when they've reached an agent. It saved me from having to sit through all those "your call is important to us" messages and horrible hold music. Regarding how they get through faster, they don't - they just handle the waiting part for you. In my experience, they used some technology that keeps trying different IRS menu options and times of day until they get through. When I tried calling myself, I kept getting the "call volume too high, try again later" message, but they managed to get through by trying repeatedly at optimal times.

Thanks for sharing the updated numbers! So does that mean if I stay HDHP-eligible all through 2025 with single coverage, I can contribute the full $8,300 for 2024 (based on December 2024's family coverage) AND also contribute $4,250 for 2025 (based on single coverage)? That sounds like a great opportunity to catch up on retirement savings.

Yes, that's exactly right! You can contribute the full $8,300 for 2024 tax year (based on your December 2024 family coverage status) and then also contribute up to $4,250 for the 2025 tax year with your single coverage. It's a great opportunity to maximize your tax-advantaged savings. Just remember you have until April 15, 2025 to make your 2024 contributions, and until April 15, 2026 to make your 2025 contributions. Many people don't realize they can contribute for the previous tax year during the first few months of the next year, which gives you some flexibility with cash flow.

I wasn't specifically audited, but I did have to deal with this when I unexpectedly lost my job 6 months into the testing period. The IRS is very clear about this - if you fail the testing period for ANY reason, even job loss or other things outside your control, you have to report the "excess" contribution as income and pay the 10% penalty. I had to file Form 8889 showing the calculation. The only exception I know of is if you become disabled or die during the testing period. Otherwise, it's a strict requirement. It ended up costing me about $850 in additional taxes and penalties, which was painful.

Great question! Your situation is actually more favorable than someone who only had partial-year coverage. Since you maintained HDHP eligibility for the entire 2024 tax year (even though you switched coverage types), you're in a much stronger position. The testing period requirement is the same regardless - you still need to maintain HDHP coverage through all of 2025. However, your risk is lower because you've already demonstrated a full year of HDHP commitment in 2024, which suggests you're likely to maintain it in 2025 as well. The fact that you had continuous HDHP coverage also means you could have contributed more throughout the year if you had wanted to, rather than having to rely solely on the last month rule. You could contribute the individual maximum for January-August, then the family maximum for September-December. But using the last month rule to contribute the full $8,300 family maximum is definitely simpler from a calculation standpoint. Given that you're planning to continue family coverage in 2025 and you've shown a pattern of maintaining HDHP coverage, I'd say the full contribution under the last month rule is a reasonable choice for your situation. Just make sure you're confident about maintaining that HDHP coverage through December 2025!

Thanks for bringing up the catch-up contributions! That's a really important detail that could make a significant difference for people in that age range. I'm curious though - if someone turns 55 during the year (let's say in June), do they get the full $1,000 catch-up contribution for that year, or is it prorated based on the months they were 55? And does the last month rule apply differently to catch-up contributions compared to regular contributions? Also, for married couples where both spouses have HSAs and one is 55+, I assume each person gets their own catch-up contribution limit based on their individual age, not combined as a family unit?