HSA Last-Month Rule, Testing Period, and Excess Contributions
Most HSA tax problems come from three rules employees rarely hear about until tax season: the last-month rule, the testing period, and excess contributions. Employers do not police them, but they can prevent the common mistakes.
The 2026 Contribution Limits
The annual limit is the combined total of employee and employer contributions to the same HSA. Employer money counts against the employee’s limit.
Self-Only Coverage
For 2026 the HSA limit is $4,400 for an individual with self-only HDHP coverage. For 2027 it is $4,500. The limit is the combined total from all sources, so employer deposits and employee deposits share it. Limits are updated each year, so confirm the current figure before setting payroll deferrals or communicating it to employees. Our free percent vs flat dollar contribution calculator turns this into dollars for your plan.
Family Coverage
For 2026 the limit is $8,750 for an individual with family HDHP coverage. For 2027 it is $9,000. This applies to someone covered by a qualifying family high deductible health plan, and the figure covers all eligible family members combined. Remind employees to check the current limit each year before they set their election.
Catch-Up at 55
An eligible individual who is 55 or older at the end of the year may contribute an additional $1,000. The additional amount is available only to the individual who is 55 or older, and it goes into that person’s own account. It does not raise the limit for a younger spouse who has a separate account.
Spouses and Catch-Up
If both spouses are 55 or older and not enrolled in Medicare, each can make the $1,000 catch-up contribution to his or her own HSA. Each spouse needs their own HSA to receive a catch-up amount. Employees with questions about how to split family contributions between accounts should confirm their approach with a tax professional.
Employer Contributions Count
Contributions from the employer, including those made through a cafeteria plan, count toward the same annual limit as the employee’s own deposits. Employees often forget that payroll deposits from the employer, including cafeteria plan amounts, use up part of their own limit. Show employer contributions clearly in your enrollment materials so employees can plan around them.
Where It Is Reported
Employer contributions appear in W-2 box 12 with code W. Employees reconcile the year on Form 8889. Employers do not prepare the employee’s return, but accurate W-2 reporting makes it easier for employees to complete theirs. Ask your payroll provider to confirm that employer HSA amounts are coded correctly each year.
How the Last-Month Rule and Testing Period Work
The last-month rule can let a mid-year enrollee contribute for a full year. It comes with a 12-month condition that catches people who leave an HDHP.
The Rule
An employee who is an eligible individual on December 1 is treated as eligible for the entire year and can contribute the full annual limit, not a prorated amount. The rule is sometimes called the last-month rule, and it can help employees who join a qualifying plan late in the year. It also comes with a catch, described in the next cards, so explain both sides.
The Testing Period
The employee must remain eligible from December 1 through December 31 of the following year. That is the testing period. Employees should keep their plan eligibility during this window to avoid a tax cost. Share this in your enrollment materials, and encourage anyone who is considering a change in coverage to talk to a tax professional first.
If Eligibility Ends
If the employee stops being eligible during the testing period, other than by death or disability, the contributions made only because of the last-month rule become income. This happens on the individual’s tax return, and the amount is based on the extra contribution allowed by the rule, not the whole account. Employees with questions should talk to a tax professional.
The Added Tax
A 10 percent additional tax applies to that amount. The employee computes it on Form 8889, Part III. It is in addition to regular income tax on the amount. Employers do not compute or report it for the employee, so refer individual questions about how it applies to a tax professional.
Common Triggers
Switching to a non-HDHP plan, enrolling in Medicare, or adding disqualifying coverage during the testing period can end eligibility. A change in spouse’s coverage, a new job, or a mid-year plan change can also matter. Remind employees to tell their tax professional about any coverage change during that period.
Why Employers Care
Employees who join a plan late in the year often ask to max out an HSA. A short note about the testing period avoids an unpleasant surprise the following year. A one-paragraph note in your enrollment guide is usually enough to prompt the right questions. Keep the wording general, state the testing period, and direct employees with personal questions to a tax professional.
Excess Contributions and How They Are Corrected
Excess contributions usually happen when two sources of money stack up, such as an employer contribution, payroll deposits, and a spouse’s account.
The 6 Percent Excise Tax
Excess contributions that remain in the account are generally subject to a 6 percent excise tax for each year they stay there. Because the tax can recur each year the excess remains, acting early limits the cost. Employers should not advise on individual returns, so encourage employees to confirm their situation with a tax professional.
Withdrawal Deadline
The tax can be avoided by withdrawing the excess by the due date of the tax return for that year, including extensions. Employees usually start by contacting their HSA custodian to request the withdrawal, so give them the custodian’s contact information. Remind them that deadlines can differ depending on when they file, and to check with a tax professional.
Earnings Come Out Too
The earnings on the excess must also be withdrawn. They are reported as other income in the year of withdrawal. Custodians usually have a form for returning excess contributions that includes earnings. Employees should keep the paperwork and share it with their tax professional when they prepare the return for the year of withdrawal.
Common Causes
Mid-year coverage changes, employer contributions the employee forgot, a spouse’s family contribution, and a missed catch-up age cutoff are frequent causes. Reviewing the list with employees before open enrollment, and again if they change coverage, can prevent many errors. A simple worksheet in your enrollment materials can help them add up all sources of deposits.
What Employers Can Do
Give employees the annual limit, remind them that employer dollars count, and point them to their HSA custodian for withdrawal forms. Give employees a year-to-date summary of employer contributions if your payroll system can produce one. That makes it easier for them to track the combined limit without having to hunt for the number.
Tax Advice
Employers should not advise individuals on their returns. Encourage employees to confirm their situation with a tax professional. This keeps HR out of the role of advisor and protects the employee from relying on general information. A plain sentence at the bottom of HSA communications is usually enough, along with a point of contact for questions.
HSA Eligibility Rule Questions
What is the 2026 HSA limit?
$4,400 for self-only HDHP coverage and $8,750 for family coverage, plus $1,000 catch-up at age 55 or older. For 2027 the limits are $4,500 and $9,000.
What is the last-month rule?
An individual eligible on December 1 is treated as eligible all year and may contribute the full annual limit.
How long is the testing period?
From December 1 of the contribution year through December 31 of the following year.
What happens if someone fails the testing period?
The contributions made only because of the last-month rule become income and a 10 percent additional tax applies, unless the cause was death or disability.
What is the penalty for excess contributions?
Generally a 6 percent excise tax for each year the excess stays in the HSA.
How can excess contributions be fixed?
Withdraw the excess and its earnings by the return due date, including extensions. Earnings are reported as other income.
Do employer contributions count toward the limit?
Yes. They count together with the employee’s own contributions.
Can both spouses make catch-up contributions?
Yes, if each is 55 or older and not enrolled in Medicare, each into his or her own HSA.
Is this legal advice?
No. This page is general information, not legal advice. Rules change and facts differ, so confirm your situation with your attorney or tax advisor.
Related Guides
Related reading: HSA Employee Education · HSA Comparability Rules · Medicare Enrollment and HSA Contributions · HSA, FSA, and Section 125 Limits · Employer HSA Contribution Calculator
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Laws and rules referenced
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IRS Notice 2008-59 — The last-month rule and the testing period for HSA contributions.
This page is general information, not legal or tax advice. Rules change and facts matter, so confirm your situation with counsel or a qualified advisor.
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