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.
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.
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.
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.
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.
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.
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.
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.
Employee advantages of using a 401(k) include the following:
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).
Employee advantages of using an HSA include the following:
HR can help employees plan for retirement by:
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