Are HSAs Better Than 401(k)s?

Saturday, March 23, 2024 19:13 Posted by Admin

Retirement is on the minds of even young employees looking for some sort of safety net to support them in their old age. Two popular retirement benefits that companies can offer are health savings accounts (HSAs) and 401(k) accounts.

Both are ways to save money and offer considerable tax benefits for those planning their retirement. However, there are some major differences between how these accounts work, as well as how they can be used. Understanding both the strengths and limitations of each of these accounts is essential when trying to create a comprehensive employee benefits package.

How Do HSAs Work?

HSAs holders can deposit funds into these accounts from their income and reduce their taxes for that given year tremendously, as well as invest the funds to gain returns tax-free. Withdrawing from these accounts is also not taxable, however, only when done to pay for qualified medical expenses.

People over the age of 65 can withdraw money from these accounts for any sort of expenses, making them a good candidate for retirement benefits packages.

How Does a 401(k) Work?

401(k)s are the most popular type of retirement account for employees in the private sector/ contributions to this account are made from the employee’s taxable income, and the funds can be invested to earn even more tax-free.

The account holder can withdraw funds from this account if necessary, but if they do so before the age of 60 they will have to pay taxes for their funds and cover a penalty.

Understanding the Differences Between the Two

At first glance, HSAs and 401(k)s appear rather similar, but there are some significant differences to consider:

  • To qualify for an HSA the employee must also have an HDHP (How High Deductible Health Plan), a healthcare plan that while has low premium costs, does come with higher deductibles;
  • Even if the employer needs to offer an HDHP plan, they do not need to offer the additional HSA. Employees can open this account themselves, while 401(k) accounts need to be offered by the employer;
  • HSA withdrawals can only be done to cover medical expenses that are approved by the plan, while 401(k)s act more as a savings account allowing people to withdraw funds for any expenses if necessary. However, the latter has rather rigid rules for withdrawal before the age of 60, making it rather impossible to access the funds beforehand;
  • Annual contributions to 401(k)s can be much higher than those to an HSA account, which means the savings ability of the 401(k) is much better;
  • From a tax management perspective, HSA has a triple tax-free quality to it, making it more convenient when it comes to taxation.

Which One Is Better?

The answer to this question generally depends on many factors, such as whether your company offers an HDHP that allows setting up HSAs, employee needs to cover health costs, and even whether the funds need to remain more accessible to employees or not.

Additionally, both these accounts can be used together to offer a stronger retirement package for employees. If you need help deciding between the two, or whether it’s possible to include both in your package, the Taylor Benefits Insurance Agency can help.

Reach Out to Taylor Benefits Insurance Today

The need for a strong employee benefits package cannot be understated, and especially when it comes to insurance, business owners can struggle to find the right plan that will both cover the expectations of employees, and fit into the company’s bottom line.

The Taylor Benefits Insurance Agency team is here to assist you in making the best choices when it comes to your employee benefits. Thanks to our expertise in this industry, we can provide you with top-tier choices when it comes to insurance, allowing you to effectively provide your staff with what they truly need.

To learn more about how we can help, we encourage you to call us directly at 800-903-6066 today.

Written by Todd Taylor

Todd Taylor

Todd Taylor oversees most of the marketing and client administration for the agency with help of an incredible team. Todd is a seasoned benefits insurance broker with over 35 years of industry experience. As the Founder and CEO of Taylor Benefits Insurance Agency, Inc., he provides strategic consultations and high-quality support to ensure his clients’ competitive position in the market.

We’re ready to help! Call today: 800-903-6066