Currently, 401(k)s and HSAs (health savings accounts) are treated as two siloed employee benefits. However, looking at them instead as complementary offerings could be a win-win for employers and employees.
Indeed, they are. However, they are perceived as totally different benefits: HSAs for healthcare savings, 401(k)s for retirement savings. And therein lies the issue — this “separate benefits” mindset means employees aren’t maximizing either one to help save for retirement, and it’s costing employers money.
Many workers, especially younger ones, don’t realize they can use HSAs as a supplemental retirement account. Many also don’t know they can invest in mutual funds in an HSA to help grow their money over time, just like in a 401(k).
Additionally, many employees may not be aware of their HSA’s tax advantages. Contributions go in income-tax free, like a 401(k). Up to annual limits, HSA funds are exempt from FICA and FUTA payroll taxes, too. And HSA funds can be withdrawn tax-free to pay for healthcare costs.
Another benefit: HSAs can be a viable way to fund expenses beyond healthcare in retirement. Workers have the option to let HSA funds build up instead of using them for today’s healthcare expenses. And those who save receipts related to those expenses can withdraw their HSA funds tax-free in retirement against those receipts, even though they may be many years old. With such benefits, it may make sense for employees — especially younger ones — to max out their HSA up to the annual limits before contributing to a 401(k).
Since lack of awareness seems to be a major reason why employees aren’t maximizing their HSAs, it’s up to employers to educate them on using these account, and why and when to sock away savings.
Another note for employers: HSAs aren’t governed by the Employment Retirement Income Security Act (ERISA), but the new Department of Labor (DOL) fiduciary rule applies, so if you provide an HSA and handle salary deferrals, it’s important to hire a reputable HSA vendor with reasonable, competitive fees.
And although 401(k)s are the primary retirement savings vehicle for many Americans, they aren’t being used to their greatest advantage, either. While increasing numbers of plan sponsors are adopting automatic enrollment and annual automatic deferral increases (auto escalation), some are hesitant because they believe either employees don’t want these features, or the opt-out rates are so low, they drive up the cost of employer matching contributions.
When weighed against the healthcare and compensation expenses for the increasing numbers of older employees who are delaying retirement because they can’t afford to retire, employer matching contributions may actually be a less costly alternative. So if you think you can’t afford to raise your match due to higher participation and deferral rates from auto enrollment and auto escalation, you may want to think again. The reality is, you can’t afford not to.
So during your next open enrollment, consider presenting your HSA and 401(k) as complementary benefits, and show how they can work in tandem to help employees set aside even more money for retirement today, so they can afford to stop working when they choose. In the end, it’ll help improve workers’ retirement readiness and outcomes, and save you money on healthcare costs and wages for older employees.
Finally, these practices have the potential to create a virtuous cycle, where the money saved on healthcare could then be dedicated to boosting your employer matching contributions, again helping your older workforce retire earlier, and fostering retention and better savings habits among younger employees. That seems like the best of all possible worlds, just by changing how we think about and use HSAs and 401(k)s.
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