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HSA vs 401K

Posted by Sean Kadel on Feb 14, 2019 3:01:04 PM

HSA vs 401(k)


If your company has decided to offer a high deductible health plan, don’t worry, you are not alone. Recent studies show that an increasing number of employers have elected to offer high deductible health plans (HDHP) either to completely replace or be offered in conjunction with a more traditional Preferred Provider Organization (PPO) plan or Health Maintenance Organization (HMO) plan. When sponsoring a HDHP, employers typically offer their employees the ability to contribute to a Health Savings Account (HSA) to help offset the increased deductible associated with the HDHP. In 2017, 19 percent of all workers were enrolled in a HDHP with a HSA savings option. This is a dramatic rise since 2007 when just over 4 percent

Contributions to a HSA are tax-deferred, like those in 401(k) plans, allowing employees to pay for qualifying medical expenses with pre-tax dollars. If your firm sponsors a 401(k) plan in addition to a HSA, an employee now has two programs to which they can allocate their savings dollars. But, can HSAs have a negative effect on 401(k) savings?

In a perfect world, employees would maximize both plans, as they serve different but equally important roles in an employee’s overall financial picture. Therefore, while there are many differences between HSA and 401(k) plans, by understanding a few key items participants can make informed decisions and elections to optimize both plans for their financial well-being. A few of these key items are outlined in the accompanying table.

Who is eligible to participate in a HSA? To be considered an eligible individual, an employee must meet the following requirements:

  • The employee is covered under a high deductible health plan (in 2019 a HDHP must have a minimum deductible of $1,350 for single coverage and $2,700 for family coverage and a maximum deductible or out-of-pocket expense of $6,750 for single coverage and $13,500 for family coverage)
  • He or she cannot be enrolled in Medicare
  • The employee cannot be claimed as a dependent on another’s tax return
  • The employee must not have any other coverage that would be considered general health insurance coverage (coverage for specific illnesses, dental or vision coverage, and long-term care insurance is not considered other coverage for determining eligibility). For a full listing, see IRS Publication 969 (www.irs.gov/publications/p969).

Though many HSAs are funded by employer payroll deductions, an employee may fund their HSA by simply writing a check to their account. Both, employers and employees, can contribute to a HSA in the same year; however, the combined contribution amount is subject to the IRS’s annual plan contribution limits.   

Comparison Chart




Main Purpose:

To fund for qualifying medical expenses that are not covered by insurance.

Retirement funding

2019 Maximum Annual Contribution:

$3,500 (Single), $7,000 (Family)


Catch-up contributions for those age 50 and over:

$1,000 (55+)

$6,000 (50+)

Investment Account Options:

Invested individually, typically in fixed asset accounts since funds need to be available to pay expenses.

Invested as part of the plan assets. Wide array of bond and equity investments available.

Tax-Deferred Earnings Growth:



Loans to Participants:


Yes, if documents permit

Tax Consequences of Distributions:

None, if used for qualifying medical expenses under IRC 213(d). If a non-qualifying expense, you must pay ordinary income tax plus a 20% penalty (up to age 65).

401(k) - ordinary income tax on contributions and interest. 10% penalty for early withdrawal.

Roth - tax-free (no tax on contributions or interest). 10% penalty on interest for early withdrawal.

Party responsible for education and compliance:



Making a choice about how to invest their available savings pool is not new for employees. Helping your employees to understand the different purposes of each plan will aid with decisions that affect their financial well-being.

Interested in learning more about HSAs and 401(k)?

Contact Us!


Topics: Retirement Planning, 401(k), HSA, retirement, tax savings, financial planning

Welcome to the RPS Blog!

This blog is dedicated to providing relevant, critical and timely information about retirement plans and ERISA changes. We provide information you need to help you stay compliant, up-to-date with the retirement industry, and ways to maximize your plan's design. The retirement planning industry is constantly changing, in this blog we will keep you ahead of the change, and aware of the impact it might have on your business. 

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