The HSA testing period might have less downside than I thought

See sawPhoto courtesy of Mike Leary

If you have an HSA (Health Savings Account)—and if you’re eligible, it’s probably a good idea to have one—you still have time to make your contributions count toward last year. Since HSAs are a great financial deal (only offset by the generally cruddy nature of the health care plans that enable you to have one) maximizing your benefits is important.

I wanted to talk more about the HSA “testing period”, as I’ve done a bit more analysis, and the calculation is, thankfully, a bit less dicey than I originally thought, and it might influence you into making different decisions.

I’m in the testing period now

First of all, let me show my hand: I decided to enter the HSA testing period all-in by contributing the full year amount to my HSA, despite only having coverage since October 2. This means that I contributed $3,400, despite technically only otherwise being eligible to contribute $566 (which is what I would be able to contribute if not for the HSA testing period).

As a review, the HSA testing period allows those people who have gained HSA eligibility mid-year to contribute as if they had coverage for the entire year. But the benefit comes with a catch, as it requires that you keep coverage/eligibility until the end of the following year. Failure to do this will mean that have to pay taxes and penalties on the over-contribution.

It’s a gamble. On one hand, you get potentially thousands of dollars of extra tax-free money. On the other hand, if your situation changes (possibly in a way that is not be in your control), you could owe taxes and penalties on that extra money.

My excess contribution

So I contributed $3,400 to my HSA instead of $566, which means that I have a potentially “excess” contribution of $2,834.

In my last post on the HSA testing period, I wrote:

[L]et’s say that I lose coverage and “fail” the testing period…That would mean that I would have an excess contribution of $2,834 ($3,400 – $566). I would then need to pay income tax on that amount, plus pay a 10% penalty. That’s around $1,000 in taxes and penalties…Ouch.

So my risk analysis was primarily based on “Do I want to potentially pay an extra $1,000?

Do you see the issue yet?

My error: taxes happen either way

Let’s separate the issue of taxes from the issue of penalties. And ignore the penalties for now.

If I “failed” the HSA testing period, I’d need to pay taxes on the money I over-contributed. This is certainly true.

But here’s the rub: this is money I would have had to pay taxes on anyway! Am I really losing anything?

Let’s say my taxable amount of that $1,000 was $750. If I hadn’t contributed to the HSA, I’d have to pay taxes on that $750. But if I did contribute and then find out I over-contributed, I’d have to pay taxes on it all the same.

What’s the difference? Nothing I can see.

So the way I’m looking at it, the only potential downside with an HSA over-contribution is the 10% penalty. That’s all!

A potential downside of $283 sounds a lot better than a potential downside of $1,000, doesn’t it?

Now, I’d still have to cover that whole $1,000 bill, but that’s a job for savings and our emergency fund.


So with this in mind, I decided to go all-in on the HSA. Now we’ll just need to wait out the year to see whether I “pass” or “fail”.

The nice thing now is that I start the year with about $2,000 in my HSA, ready to be spent on qualified medical purchases, or merely invested for the future. Now that’s a much nicer choice.

Regardless of where you fall on the HSA testing period, the goal remains the same: contribute as much as you can to an HSA, as it will save you money. That analysis is easy.

But enough about me. How much do you contribute to your HSA?

Mike Pumphrey

Mike Pumphrey

I'm the founder and author of Unlikely Radical, a site to help people succeed with money, achieve their goals, and live intentionally.

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Mike Pumphrey
Posted on January 15, 2018