HSAs are one of advisers’ favorite savings tools, but they might be hurting 401(k) contributions, according to a new report.
Health savings accounts can be one of the best ways to save for retirement, as contributions, investment returns and eligible expenses are all tax free. If clients have access to an HSA, most financial advisers readily encourage them to take advantage of it.
But the money to fund those accounts must come from somewhere, and for many, the most obvious place appears to be the 401(k). More than half of people with 401(k)s reduce their contributions during the first year they begin participating in an HSA, the Employee Benefit Research Institute found in a report published Thursday.
Read more: Prioritizing savings: 401(k) vs. HSA
The results hint that many people are financially unable or unwilling to direct a higher percentage of their income to savings when a new account is added.
“The results show evidence of a crowding out,” according to the EBRI report. “Overall, 56% of 401(k) participants reduced their contributions in the first year that they made HSA contributions.”
Surprisingly, the effect is most pronounced among those who had been making the biggest contributions to 401(k)s, both in terms of total dollars and as a percentage of income. And even as income levels went up, so too did the percentage of people cutting back on 401(k) contributions when starting an HSA, the report found.
“Those contributing the most to their 401(k) experienced the largest 401(k) declines at the median in the first year of HSA contributions. 401(k) contributions fell 19% in year two among those contributing $8,501 or more in year one,” the authors wrote.
About half of workers earning between $25,001 and $75,000 cut back on 401(k) deferrals after starting an HSA, EBRI found. But 55% of those with incomes of $75,001 and $100,000 made such reductions, and it was 64% among people taking home up to $150,000. At the highest income level, above $150,000, 75% of people reduced 401(k) contributions after starting an HSA. That relationship also appeared at the lowest income level, $25,000 or less, where 63% of people pared back their 401(k) saving.
Of course, many workers who started HSAs did not change their 401(k) contributions, and some increased them. At the 10th percentile, the change in annual 401(k) contributions was -$5,127, while at the 90th percentile it was an increase of $1,143. The median change was -$34, according to the report.
One of the factors linked to higher HSA participation — the employer match — had a negative effect on 401(k) contributions. But the 401(k) matches from employers had no clear relationship.
“The generosity of employer HSA contributions affects employee 401(k) contributions: Those with a higher ratio of employer to employee HSA contributions were more likely to reduce their 401(k) contributions,” according to the report.
The amount of people using HSAs has continued to grow for years, as has the average account size. But most users treat their HSAs like checking accounts for ongoing medical expenses, rather than as long-term savings vehicles. And the popularity of HSAs is stymied by their pairing with high deductible health plans, which are not ideal for everyone.
For the report, EBRI used data for 5.5 million HSAs, representing $11.3 billion in assets, or about 27% of the total HSA business in 2016. The 401(k) data, also for 2016, was provided in partnership with the Investment Company Institute. That data reflected $2 trillion in assets across more than 27 million accounts in about 111,000 401(k)s.
Among those data sets, there were 45,132 workers who had a 401(k) and an HSA, according to EBRI.
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