Funding Your HSA: How to Use the Last-Month Rule For Maximum Effect


Your Health Savings Account (HSAs) provides great tax benefits: tax-deductible contributions, tax-deferred investment earnings, and tax-free HSA distributions if used for paying qualified medical expenses incurred by you or your family. If you don’t need to use your HSA savings to pay for current medical expenses, you may accumulate money in your HSA from year to year, like an IRA, to use when you need it. Also, HSAs are not tied to an employer. Your HSA can continue to hold assets even after you no longer participate in an employer’s high deductible health plan (HDHP). These characteristics make HSAs useful not only for paying current medical expenses but also for saving for medical expenses in retirement. Because of these benefits, many people maximize the amount they save in their HSAs each year. 

The amount you can save in your HSA each year depends on the type of HDHP coverage you have, your age, and how many months of the year you were HSA-eligible.

If you were only eligible for a portion of the calendar year, your contribution limit is based on the number of months you had HDHP coverage (and met the other eligibility requirements). For example, if you had self-only coverage from January 15 through August 10, you were eligible for 6 full months, or for ½ of the annual contribution limit for self-only coverage ($1,750). If you’re age 55 or older, you may also contribute the catch-up contribution for the number of months you are eligible.  Any contributions made on your behalf by your employer count toward your annual contribution limit.

Last Month Rule

If you were eligible for only a portion of the year but you want to maximize your HSA tax benefits, you may calculate your contribution limit using the “last-month” rule. Under this rule, if you are an eligible individual on December 1, 2019, you will be considered an eligible individual for all of 2019, based on the HDHP coverage you had on December 1. If you make the full year’s contribution under this rule, you may deduct the entire contribution.

To be eligible to make the full-year contribution under the last-month rule, you must remain HSA-eligible during the “testing period.” The testing period begins December 1, 2019, and ends on December 31, 2020.  If you do not remain HSA-eligible during this testing period (other than because of death or disability), you must include in your taxable income the amount of contribution you made to the HSA for 2019 that could not have been made except for the last-month rule. This amount is also subject to a 10% additional tax for failing to meet the testing period. 


Erik, age 29, had self-only HDHP coverage as of January 1, 2019. Erik got married in September 2019 and had family HDHP coverage in place as of October 1, 2019. Because Erik had family HDHP coverage on December 1, 2019, he was eligible to contribute the family coverage contribution limit for 2019 ($7,000).

In 2020, however, Erik changes jobs and is no longer covered by an HDHP. This means Erik fails to meet the testing period requirement.  As a consequence, he must include in his 2020 taxable income the contribution amount he would not have been eligible to make if not for the last-month rule. Erik uses the worksheet in Form 8889, Health Savings Accounts, to determine this amount.

• Erik had self-only coverage for 9 months of 2019, so he was eligible to contribute $2,625 (9 x $291.66).

• He also had 3 months of family coverage, so he was eligible to contribute $1,750 (3 x $583.33).

• Erik’s total eligible contribution limit for 2019 (without the last-month rule) was $4,375 ($2,625 + $1,750).]

• Erik must include $2,625 ($7,000 – $4,375) in his taxable income in 2020. A 10% additional tax applies to this amount, as well.


You can make HSA contributions for 2019 up until your 2019 tax return due date – generally April 15, 2020.

For more information and an explanation of all the HSA rules, see IRS Publication 969, Health Savings Accounts and Other Tax Favoured Health Plans.