How I passed the HSA testing period

Japanese Classroom

Last year, when I started my new job, I was given two options for health care: bad and worse.

I went from having access to an “A1” and “B1” plan to a “B3” and “C3” plan. Without even knowing the details, you know that’s not good.

Granted, I was grateful to have any coverage at all. Let’s be honest, given the recent attempts there have been to take away health insurance from as many people as possible, just being able to have health insurance feels like a win.

But not much of one. These plans were expensive, and most of them only covered catastrophic care. Perfect if I had my arm cut off or came down with the plague, but not great for routine and ongoing care.

One of the silver linings of such a disappointment was that one of those plans was labeled as HDHP, or High Deductible Health Plan. This meant that I was eligible to contribute to an HSA, or Health Savings Account, a kind of 401(k) for medical expenses.

The HSA is the best of a bad situation, and if you have access to one, I highly recommend you use it. Having the ability to pay for medical expenses pretax can be a huge money saver.

But in my situation, there was a potential catch. Due to my mid-year eligibility, I had two options:

  • Contribute my prorated amount based on the month of my eligibility
  • Contribute the full year amount, but be forced to stay on a HDHP for the entire next calendar year or pay penalties. (This is known as the “Last Month Rule“.)

My health plan started in November. So with the Last Month Rule, I could contribute the full $3,450 for the year, as if I had gotten coverage in January, but I would have to maintain that same coverage until the following December, so a total of 14 months.

Given open enrollment for me, this meant that I would have to sign up for the HDHP for two whole years.

More to the point, the HDHP would have to be offered. If it wasn’t available, I would be liable for hundreds of dollars in fees. In short, I would need to pay back all of the extra pretax benefits I had earned.

This is what is known as the “testing period“, a name that brings up images of school exams.

The problem being, that much of this test isn’t up to you.

No control over the outcome

I can understand why the testing period exists. As you are given an option to contribute more than your technical eligibility, there needs to be a way to lock you in to the plan, so you don’t just enroll, buy up to the maximum, and then cancel, reaping the benefits of that pretax money, but without paying into the plan.

READ MORE:  How much can you contribute to an HSA?

I get all that.

The problem is that the scheme is at least partially dependent on whether your job offers such a plan.

Sure, I had an HDHP last year. But there’s nothing in law that I can find that mandates an employer to offer an HDHP. What if they dropped it?

If your job drops the HDHP, you have a choice: you can stick with a non-HDHP plan and pay the penalties, or ditch your company’s insurance plan outright, and shop on the Healthcare.gov marketplace to find a plan.

Given that those who have job-based coverage generally don’t qualify for the tax breaks that make marketplace insurance affordable, this could be a costly choice as well.

And that is even assuming that the open enrollment at your job overlaps with the marketplace open enrollment period, which has been shortened in recent years (of course).

And let’s not even talk about the complications of a possible job loss.

Will I pass?

So for the past year, I’ve been apprehensive, wondering if when this year’s open enrollment came around whether I’d have any good options.

Well, that time has just arrived. And as for my insurance options, an HDHP plan was in fact offered to me through my job. So I could keep an HDHP, and pass the testing period. Whew!

Testing period success
I’ve never been so happy to get a C.

But I don’t really feel like I did anything in this achievement. I was purely at the mercy of forces beyond my control. I don’t like that at all.

Is this anxiety worth the tax breaks? Only you can say for sure.

But enough about me. Have you encountered the “testing period” or the “last month rule”? How have you handled it?

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