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HSAs vs. 401(k)s: Educating employees on how to maximize savings

By David Speier | April 22, 2021

Fully funding an HSA may make more sense before overfunding a 401(k) without or beyond an employer match
Benefits Administration and Outsourcing Solutions|Retirement

Most people understand how important it is to save for retirement, but many aren’t aware that the high cost of health care during those years can undermine their ability to enjoy a secure postemployment life. A man who retires at 65 in 2020 will live another 20 years on average and incur approximately $165,000 in medical, dental and vision care expenses. A woman retiring at the same age will live to 87 on average and spend approximately $189,000. For a couple, the total cost, if both are age 65 today, will be $354,000 over their lifetimes. And these amounts don’t include the cost of long-term care or early retirement1.

How can your employees decide how best to save for these postretirement costs? Both 401(k) plans and health savings accounts (HSAs) have pros and cons as ways to save for health care in retirement. Figuring out where employees should focus their savings can be confusing, especially if they can’t afford to fully fund both.

As an employer, you play a crucial role in educating your employees on how to prioritize contributions to their 401(k) plans and HSAs so they can maximize the value of their savings. Employees need your help to make the best decisions possible for their future physical and financial wellbeing.

What are the pros and cons of saving in a 401(k) or an HSA?

401(k) plans have been around longer and are more widely adopted than HSAs. People understand how they work and are comfortable with them as a retirement savings vehicle.

Traditional 401(k) plans provide an up-front tax advantage because payroll contributions are deducted pre-tax. Key to their power as a retirement savings vehicle is the contribution match offered by most employers. For example, a common match is 50% of employee contributions, up to 6% of their salary. In addition, 401(k)s do not require an active election each year, and they allow for an auto enrollment by the employer. These features help to drive 401(k) contributions and savings; however, once retired employees start to draw on the funds in a 401(k), withdrawals are taxed as ordinary income.

In contrast, HSAs offer a “triple tax” advantage because money deposited into an HSA is never subject to federal income taxes. Employees deposit pre-tax dollars into the account; earnings on any growth in the account are not taxed, and contributions and earnings are not subject to federal income taxes when withdrawn to pay eligible health care expenses.

HSAs also offer greater withdrawal flexibility than 401(k) plans: They allow an individual to withdraw money at any time for current or future qualified health care expenses, with none of the 401(k) age restrictions.

HSAs allow an individual to withdraw money for non-health care expenses. If the withdrawal is made and the individual is 65 or older, the expense is only subject to income tax and not an additional penalty, just like a 401(k). If a withdrawal is made for something other than a qualified medical expense before the age of 65, the individual must pay income tax plus a 20% penalty. In order to qualify for an HSA, employees must meet certain eligibility criteria. They must be covered under a high-deductible health plan (HDHP), must not have any other health coverage except what is permitted, cannot be enrolled in Medicare and cannot be claimed as a dependent on someone else’s tax return.

HSAs do have lower contribution limits compared with 401(k) plans. Employees can contribute up to $19,500 to a 401(k) plan in 2021, with those age 50 or over eligible for an additional catch-up contribution of $6,500. HSA limits are lower: For 2021, the limit is $3,600 for an individual and $7,200 for a family, with $1,000 catch-up contributions after 55. The earlier individuals start to contribute to an HSA, the more likely they are to have enough in the account to pay for their health care costs in retirement.

How should you advise your employees to prioritize saving in a 401(k) versus an HSA?

Employees should usually prioritize saving with a 401(k) up to the limits of their employer match. Maximizing HSA contributions should come next, and employees who can afford to do both should do both.

If you don’t offer a 401(k) match, HSAs are definitely a better savings vehicle for health care in retirement. In general, employees without a match should contribute the maximum to their HSAs before they maximize 401(k) contributions, if they have to choose between one or the other.

In either case, employees will need advice on how much total savings will be required to support retirement. Many factors influence their total retirement saving goals, including other retirement income sources such as Social Security, pension and personal savings, as well as the number of years they will be able to contribute to the 401(k) and the HSA.

The bottom line: Maximize HSA contributions

HSAs offer specific advantages over 401(k) plans as a way to save for health care in retirement.

In addition to greater withdrawal flexibility, dollar for dollar they are worth more than unmatched savings in a 401(k). Each dollar saved in an HSA is worth 25% more than a dollar saved in a 401(k) without an employer match, based on a 20% marginal tax rate. A good strategy for your employees is to start prioritizing contributions to their HSAs after they reach the limit of the match on their 401(k)s.

Emphasize the value of starting to save as soon as possible in an HSA. Under current HSA contribution limits, employees who start saving early in their careers will retire with enough money to cover their retirement health care expenses. Even if an individual starts to save at a later point, maximizing contributions for as many years as possible and taking advantage of catch-up contributions after age 55, an HSA can still defray a significant portion of health care expenses in retirement.

HSA strategies employers may want to consider:

  • To boost savings and enrollment, employers can match contributions to an HSA: These matching contributions are tax-free and are still subject to the annual limit set by the IRS.
  • Develop an HSA communication plan: Help your employees understand why investing in an HSA is important for their long-term financial health and wellbeing strategy. Communicate regularly throughout the year and during open enrollment.


1 approximate expenses with a Medicare supplemental plan


Managing Director, Benefits Accounts
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