HSAs & 401(k)s: Benefits, Differences, and Leveraging These Accounts

Younger generations are becoming more aware of the benefits of long-term savings. According to a study conducted by Fortune, Gen Z are 32% more likely to invest in their workplace retirement plan than their older colleagues were at their age.

According to Forbes, Gen Z investors are saving towards three primary goals: having enough money to travel/vacation, saving for unexpected expenses, and being able to retire when they choose and live comfortably. Employer-sponsored retirement plans and savings accounts like HSAs and 401(k)s can help workers save money and plan for the future.

What Is an HSA?

A health savings account, or an HSA, is a type of personal savings account that lets you set aside money to use for qualified medical expenses. The advantage of using an HSA is that it’s non-taxable. According to the IRS, you must be covered by a high deductible health plan, or an HDHP, on the first day of the month to contribute to an HSA. 

HSAs are important because offering flexible, competitive benefits packages is one way to help recruit strong candidates and retain employees. 

What Is a 401(k) Plan?

A 401(k) plan is a retirement savings and investment account offered by employers that allows employees to contribute pre-tax income. The term comes from the section of the Internal Revenue Code that established and governs this type of retirement plan.

Contributions are convenient since the desired amount is often just deducted from each paycheck. 

Who Can Contribute to an HSA? 

Both employees and their employers can contribute to an HSA, but the IRS limits the total contributions to any individual account each year, and adjusts that limit for inflation. In other words, the more an employee contributes, the less the employer can contribute, and vice versa. 

Employer contributions to an HSA are optional and seen as an added benefit. Employer contributions to employee HSAs are reported using Form W-2. 

Who Can Contribute to a 401(k) Plan?

Employers are not required to contribute to employee 401(k)s, and those that do contribute have options for how to do so.

Many employers contribute a fixed percentage of each employee’s salary while others will match an employee’s contribution up to a certain percentage. For example, an employer may match 3% of an employee’s salary, or they may match 50 cents on the dollar for employee contributions up to 6%. 

An employer’s matching contribution is essentially more money for the employee in the long run. That’s why financial advisors often encourage their clients to contribute at least enough to take full advantage of their employer’s match if the individual is financially able. Of course, each employee’s situation is different, and they should consult a financial advisor before determining how much to contribute to their particular plan.

Check out our HR Party of One episode to learn more about how 401(k) plans work. 

Effect on Savings Accounts If Employee Leaves or Retires

401(k) plans are portable and can roll over onto a new employer’s plan. Retirees can start accessing 401(k) funds without a penalty at age 59.5. Early withdrawal from a 401(k) plan typically counts as taxable income and potentially results in a 10% penalty. 

HSAs are also portable. Employees can take their funds with them when they leave their company. HSAs roll over from year to year, making them an excellent investment for younger, healthier employees who may not need to pay as much for healthcare right away. 

If an employee reaches age 65, the HSA begins functioning similarly to a 401(k). Money held in the HSA can be withdrawn for any reason, but any withdrawals not used for qualified medical expenses will incur ordinary income tax. 

Does an HSA Affect Your 401(k)?

The short answer is, no. HSAs and 401(k)s are two separate entities. However, you can leverage the two to help you save for retirement. 

Can You Contribute to an HSA and a 401(k) at the Same Time? 

Yes! You can contribute to an HSA and a 401(k) at the same time. Most experts recommend maxing out HSA contributions before maxing out 401(k) contributions. 

When you need to spend money on sudden health expenses, having funds in your HSA can be a lifesaver. You can withdraw funds from your HSA to spend on qualified medical expenses at any time without penalty. However, if you contribute all of your funds into your 401(k) and need to spend money on health care, you will face financial penalties for early withdrawal of funds. 

Advantages of Using a 401(k)

Employee advantages of using a 401(k) include the following: 

• 401(k) contributions are made on a pre-tax basis, which lowers employee taxable income for the year. They simplify payroll deductions because employees choose their contribution amounts once at benefits enrollment.
• 401(k) funds are not tax-free. Instead, they are tax-deferred, which means employees benefit upfront by lowering their taxable income. Employees will eventually have to pay federal and state income tax on any funds they withdraw from their 401(k) account, but this is still advantageous because they will likely be in a lower tax bracket during retirement than they are now. 
• 401(k) plans have compound interest. Although the fund itself isn’t tax-free, it grows tax-free as long as it is kept in the 401(k) plan. The sooner you start investing, the more money you will be able to save. 
• Because 401(k)s legally belong to the employer, not the employee, it’s more difficult (but not impossible) for the IRS to place a lien on the account, which offers employees a strong sense of retirement security. 

For employers, one advantage of sponsoring a 401(k) plan is that employer contributions are deductible on the employer’s federal income tax return (as long as the contributions do not exceed the IRS’ limitations). 

Advantages of Using an HSA

Employee advantages of using an HSA include the following: 

• HSA contributions are also made on a pre-tax basis, which lowers employee taxable income for the year. 
• Any growth or earnings on an HSA account accrues tax-free– meaning that an employee can grow their account and further increase their spending amount on medical expenses.
• With traditional tax-advantaged accounts like IRAs or 401(k)s, employees pay taxes whenever the money is withdrawn. With an HSA, employees do not pay any taxes when withdrawing funds to pay for qualified medical expenses. 

How Can HR Help Employees Plan for Retirement?

HR can help employees plan for retirement by:

• Educating employees about the benefits of HSAs and 401(k) plans.
• Ensuring employees understand their investment options and offer a range for employees to choose from. 
• Offering contributions to employee HSAs or 401(k) accounts. This can be done through a matching program or by providing a set contribution amount. 
• Choose a reliable HSA provider that offers easy-to-use tools and resources for managing the program. 

Additional Resources

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• BernieU—free online HR courses, approved for SHRM and HRCI recertification credit
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• Resource Library—essential guides covering a comprehensive list of HR topics
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