Tax Question - HSA (Vanity)

We have some good tax minds here, so I have a question about the HSA last month rule. I can’t seem to get a good answer, elsewhere, so YES, this is a vanity.

A relative had an HSA 2023 and most of last year. The relative got a new job last year that had normal health insurance and no HSA.

On the tax program being used, the question brings up “2023 contributions eligible due to last-month rule.” How is this determined? What does 2023 have to do with anything, when that tax year was on their taxes last year? Note that the contributions to the 2024 HSA were apparently all made by their employer.

Do all of the 2024 HSA contributions become taxable because of not having a full year with an HSA plan, for 2024?

A question and answer according to Grok:
No, not all 2024 HSA contributions become taxable if you didn’t have an HSA-eligible plan for the full year. The taxability depends on your eligibility and the “last-month rule.” Here’s how it works:
• Prorated Contributions: If you weren’t enrolled in an HSA-eligible high-deductible health plan (HDHP) for all 12 months of 2024, your contribution limit is generally prorated based on the number of months you were eligible. For 2024, the maximum contribution limits are $4,150 for self-only coverage and $8,300 for family coverage (plus $1,000 catch-up if 55 or older). You can contribute 1/12 of the annual limit for each month you were eligible (i.e., enrolled in an HDHP on the first day of the month). Contributions up to this prorated limit remain tax-deductible.
• Last-Month Rule: If you were enrolled in an HDHP on December 1, 2024, and remain eligible through December 31, 2025 (the testing period), you can contribute the full annual limit ($4,150 or $8,300, depending on coverage) as if you were eligible all year. These contributions are tax-deductible, provided you stay enrolled in an HDHP during the testing period.
• Taxable Contributions: If you contribute more than your prorated limit and don’t qualify for the last-month rule, the excess contributions are not tax-deductible and are included in your taxable income. Additionally, excess contributions are subject to a 6% excise tax unless withdrawn (along with any earnings) before the tax filing deadline (typically April 15, 2025). If you fail the testing period under the last-month rule (e.g., you lose HDHP coverage before December 31, 2025), contributions that wouldn’t have been allowed without the rule become taxable income for the year you lose eligibility, plus a 10% penalty.
• Example: If you had an HDHP for 6 months in 2024 with self-only coverage, your limit is $4,150 × 6/12 = $2,075. If you contributed $3,000, the excess $925 is taxable and subject to the 6% excise tax unless corrected. However, if you were eligible on December 1 and contributed the full $4,150, it’s tax-deductible as long as you maintain HDHP coverage through 2025.
To avoid issues, calculate your eligible months, monitor contributions (including employer contributions), and correct any excess before the tax deadline. If you’re unsure, consult a tax professional to review your specific situation.

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