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August 13, 2007

An employee starts an HSA on October 1, 2007, and elects to contribute the full-year amount available for self-only coverage: $2,850. Assuming there is not a death or case of disability, how long must the employee continue to be eligible to participate in the HSA (i.e., have high-deductible health plan coverage and no disqualifying health coverage) in order avoid the taxation and penalty on the 2007 contributions?

• Through September 30, 2008, 12 months after HSA participation began.
• Through December 31, 2007, the end of the current taxable year.
• Through October 31, 2007, 12 months after the month in which HSA participation began.
• Through December 31, 2008, the end of the next taxable year.

Per §305 of the Tax Relief and Health Care Act, which amended the HSA statute found at 26 USC §223, HSA participants lose the tax-exempt status of these contributions if they fail to maintain HSA eligibility during the testing period. This period is defined in that section as “the period beginning with the last month of the taxable year … and ending on the last day of the 12th month following such month.”

Please note: During the balance of 2007 (October, November and December), the HSA participant would have to maintain HSA eligibility in order to make the contributions.