For instance, if an eligible individual enrolled in Medicare during the tax year in which they were contributing to an HSA, the maximum the employee could contribute would be limited to those months before enrolling in Medicare. The contribution amount would be prorated based on the number of months the employee was an eligible individual.

As of 2007 (Tax Relief and Health Care Act of 2006), an employee who enrolls in a qualified HDHP by the first day of December of any year will be treated as though they were an eligible individual for the entire year and would be able to contribute the maximum allowed for that tax year. Prior to 2007 tax year, if an employee enrolled in a HSA qualified HDHP in any month other than January 1 the maximum that could be contributed would also be limited to the number of months that the employee was enrolled in the HDHP.

The employee must remain an eligible individual for 12 months following the end of the year in which they become an eligible individual, or the portion of HSA contributions attributable to the months that the individual was not actually HSA eligible will be included in gross income and subject to a 10% additional tax penalty. To avoid the potential tax implication prorating is the best option.