Many employees now have two accounts that employers are encouraging them to contribute their hard earned money to: a 401(k) and a Health Savings Account (HSA). When deciding whether and how much to contribute, employees will consider things like the 401(k) match and their expected medical expenses. Employees with enough money can simply choose to take full advantage of both accounts. But for employees with more demands on their paychecks, choosing which account to fund is not a straightforward decision.
One important consideration is that diverting savings from the 401(k) to the HSA can cost employees their 401(k) match. There is a way around this problem, however. As I explained in this post, Mercer has developed a solution that allows the employer 401(k) matching contribution to apply to employee contributions made to either the 401(k) or HSA account.
There are risks in utilizing one account over the other. If employees in a high deductible plan do not contribute to their HSA in order to earn the 401(k) match, they will need to pay for medical expenses out of pocket and forgo the valuable tax savings – or possibly even forgo medical treatment and risk longer term health problems. Conversely, employees who divert savings to their HSAs have these tax-favored assets to pay for medical expenses at the risk of their retirement readiness.
A recent EBRI study found increased utilization of HSA assets by participants with higher balances. This increased utilization may be important since some studies suggest that participants in high-deductible plans have been forgoing care at the expense of their health.
While employers can help employees achieve a balance between competing priorities with good benefit design, how employees use their benefits is ultimately their responsibility. Employers can make the HSA easier to use and fund, but it will be just as important to educate employees and make sure that they understand how the HSA can be a key tool in both their short-term and long-term financial security.