SHIFTING FROM 401K TO HSA
IS HEALTH SAVINGS ACCOUNTS SUPERIOR TO THE 401(k)?
We believe it is, and here's why.....
LOWERS THE HEALTHCARE SPEND FOR THE EMPLOYER
One of the ways employers can begin taking advantage of Health Savings Accounts (HSA) over traditional 401(k) plans, is by moving the company sponsored group plan to a high deductible HSA compatible plan options. Then establish an employer HSA to make tax free contributions, the savings you get from the high deductible plans, afford the ability to make contributions to the HSA. The triple tax advantage makes if more attractive for both employers and employees.
LESS FEES ASSOCIATED WITH HSA'S VS 401(k)
401(k) plan fees can vary greatly, depending on the size of your company 401(k) plan, the number of participants and the plan provider. One study found that large plans (more than $100 million in assets) almost uniformly have fees below 1%. The largest plans are usually below 0.50%.
The small plan marketplace is a different story. Average fees for small plans (under $100 million in assets) were between 1.5% and 2%, with plenty of plans with less than $50 million in assets paying more than 2% a year in fees.
The difference between these two scenarios and an HSA is there is no fees to operate an HSA for an employer and it's employees.
HSA HAS LESS ADMINISTRATION OVER AN 401(k)
No plan filings, no 5500 form submissions, and no administration to maintain your company sponsored HSA. A study conduct by the Harvard Business Review stated more administrators of 401(k) plans would much rather dedicate time on other matters than deal with 401(k) plan administration.
No more headaches, when an employee leaves there is no separation process. No rollovers, no penalty liabilities, no hassles. As long as the employee leaves the money that they have accumulated in their HSA they can continue to use for medical expenses, and at age 65 funds can be withdrawn for non medical purposes with no penalty, although you will pay regular tax at time of withdrawal or moving funds to an investment account to defer paying taxes.
This is another big differentiator between, HSA's and 401(k), you can withdraw for qualified, medical expenses, with no penalty, in fact it is expensed tax free. Before age 59 1/2 you can never make a withdrawal from your 401(k) without invoking a penalty
Considerations for Comparison
Health Savings Account (HSA)
|Contributions free from Medicare and Social Security taxes?||No||Yes|
|Tax-free distribution for medical expenses?||No||Yes|
|Tax-free payment of Medicare Premiums in Retirement?||No||Yes|
|May receive employer contribution?||Yes||Yes|
|Contributions free from state and federal taxes?||Yes||Yes|
|Ability to invest your funds?||Yes||Yes|
|Portable? (Account belongs to you, not to your employer)||Yes, but you must rollover account to new custodian to avoid 20% income tax and possible early withdrawal penalty||Yes|
|Pay penalties or taxes for withdrawing funds before age 59.5?||Yes||No, if funds are used to cover eligible medical expenses|
|Required to take minimum distributions at age 70.5?||Yes||No|
Optional, but highly
*Trends predict that HSA will replace 401(k) by 2035 in less than 20 years the market will make a dramatic shift, as employers look to achieve more with less administration and less cost to operate.
This means the COVID-19 pandemic may accelerate the adoption rate and could potentially faze out 401(k) before 2035