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HOW DOES THE LAST MONTH RULE WORK WITH A HEALTH SAVINGS ACCOUNT ?

If you were an eligible individual under the "Last-Month Rule" at the first day of each month during the year. (To refresh your memory as to definitions of terms, please refer to our blog "How a Health Saving Account Can Save You Income Taxes" dated July 06, 2016 at www.creasmanfp.com)  The "Last Month Rule" means you were an eligible individual on December 1, thus, you may contribute up to $ 3,350 or $6,750 depending on whether your's  is a single plan or family plan.  You have until April 15, 2017 in which to make the contribution. The contribution is deductible on your 2016 tax return. You may contribute an additional $1,000 if you are age 55 at year-end. However, if you take advantage of the "Last Month Rule", you are subject to the "testing period" provision. The testing period provision is best explained by an example:

You take advantage of the "Last Month Rule" when you contribute $ 3,350 to your Health Saving Account on April 1, 2017. You are under age 55 at December 31, 2016 so the additional $1,000 contribution is not available to you. You deduct the contribution - $3,350 - on your 2016 tax return. If you meet the "testing period rule", there is no downside for taking advantage of the last month rule.

The testing period runs from December 1, 2016 through December 31, 2017. You must maintain your Health Saving Account throughout the testing period.

What if you fail to do so ? You take advantage of the last month rule for tax year 2015. You maintained your HSA until June, 2016. Since you did not meet the testing period provision, you will report as income the deduction taken in 2015 for the amounts allocated to the months during 2015 that you were not an eligible individual. In this scenario 279.17 X 11 months = $3,071 would be included in your 2016 tax as income. Additionally, the $3,071 income would result in a ten percent penalty - $307.

So, you should look before you leap.

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