Don't stop at the 401(k) match: Why employers should consider adding HSA contributions

In an increasingly competitive job market, employers looking to attract and retain talent should consider this additional arrow in their quiver: Open up 401(k) match calculations to include a health savings account contribution and educate employees to the various benefits of doing so.

William Mon, senior principal health and benefits consultant at Mercer, shares how important it is for employers to educate their employees about HSAs and provide them with the benefits of a 401(k)/HSA match for their short-term and long-term financial planning.

BenefitsPRO; Currently, what is the most favored option that employees have to save for retirement?

William Mon: Most employees choose to put their money into a 401(k), especially if they will get an employer match. In doing so, they may forgo the potential benefit of an HSA and the tax benefits that they could be getting there.

It is possible for employers to open up the 401(k) match calculation to include the HSA contribution so the employees don’t lose the matching contribution when they contribute to the HSA.

Why should employers include the HSA in the match calculation?

Allowing the 401(k) match calculation to include the HSA contribution brings financial flexibility to employees. It allows employees to put their money where they need it most, while still receiving their employer match and saving for the future. It also carries little risk – if the contribution that goes into the HSA isn’t used, it will be saved and eligible for use after retirement similar to a 401(k).

Why should employers educate their employees on the benefits of the HSA match?

It is likely that most, if not all, employees already know what a 401(k) account is, but the same cannot be said for an HSA. Employers need to be fully transparent with employees and educate them on the benefits of an HSA.

Right now, a lot of employees don’t understand the HSA very well, and many often confuse it with flexible savings accounts that have very limited rollover options. This is a great opportunity for employers to educate their employees. It is also important to mention that the pre-tax money put in an HSA can be extremely helpful in the case of a medical emergency or for short-term or long-term disability medical expenses.

Can you provide a concrete example of how much more employees would save with this option?

When Mercer recently performed an assessment for clients considering this design, the average impact to retirement savings was about a $4,000 increase per year after retirement due to tax savings.

The only change by the participant was to utilize the HSA instead of the 401(k) to save while still earning the match contribution – with no additional money contributed. For example, a company with 10,000 employees in an HSA-eligible plan would see a $40 million increase in retirement savings value per year.

Does offering the 401(k)/HSA match benefit employers in any way?

For employers, offering employees this alternative increases the overall value of the benefits they provide. It can also entice a greater number of employees to enroll in the employer-sponsored high-deductible plan, because contributing to an HSA without losing the employer match makes it easier to save for future medical expenses. Employers would also save in payroll tax dollars. Few other changes that employers are considering would provide such a valuable benefit to their employees.

Would you say that the “Flexible 401(k)/HSA” is a financial wellness solution?

I wouldn’t say it’s a financial wellness solution, but it definitely allows for employees to be flexible with their savings, which helps with financial wellness. Since the employee has the flexibility to choose where the money is saved, they can put it where they need it. In the HSA, it’s available for medical emergencies and helps them avoid hardship withdrawals from the 401(k), and the associated taxes.

For employees with many demands on their paychecks, lack of savings flexibility requires them to find more money to get the full 401(k) match and fund their HSAs for emergencies.

Essentially, having the option to do the 401(k)/HSA match allows employees to maximize their savings, which will help them in the long run.