Tax change: I expect large companies to start pushing HSA over 401k

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permabull
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11:48a, 5/23/25
AG
Edit: apparently too broken https://www.shrm.org/topics-tools/senate-finance-committee-cuts-massive-hsa-changes-from-tax-bill-

The new tax bill makes some interesting changes to HSAs doubling how much you can put into them each year, but there are two catches.

1) the extra contributions must come from a payroll deduction
2) They phase out for high income

Households making 150k and saving into an HSA family plan will be able to contribute a little over $17k to an HSA.

The kicker is at these income levels, these contributions if made with payroll deduction also avoid payroll tax which is split between you and your employer, so you save by not paying 7.65% and your employer saves the same dollar amount. This is not true for 401k where you (and your company) have to pay this payroll tax.

The fact that this bonus fades away for high income (where payroll tax is already capped so no savings for the employer or employee) and the fact it only applied to people who can make payroll contributions to an HSA leads me to believe it was companies looking to save on taxes that pushed this change.

I wouldn't be surprised to see employers pushing more education about how HSA can be used just like 401ks after age 65 to their employees and also start to shift the 401k match into the HSA side of the house rather than 401k to encourage more people to save there instead.
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Definitely Not A Cop
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11:51a, 5/23/25
AG
That's pretty awesome. It's also going to allow up to $1000 / year / family in gym memberships.
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JDCAG (NOT Colin)
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12:03p, 5/23/25
AG
No snark here, honest question (because I stuff away cash in our HSA each year) - what are the rules surrounding its usage when you hit 65? I only know that for now, it can cover medical related costs.
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permabull
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In reply to JDCAG (NOT Colin) • 1:00p, 5/23/25
AG
After 65 you can use the funds for anything without the 20% penalty but it will be taxed as ordinary income if you use it that way. This is essentially the same as a tax deferred 401k you just have to wait an extra 5.5 years.

401k would still have advantages for when you leave them as an inheritance and in some states HSAs aren't considered tax free growth for state income tax purposes and also don't have the same protection against civil liabilities that the 401k would enjoy.
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permabull
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1:06p, 5/23/25
AG
Also wanted to point out that since you don't pay payroll tax on these contributions they don't count for your income when calculating your social security benefits down the line. So a single income household on an HSA earning $150k but stashing 17k in an HSA would receive a smaller social security check when they retire than someone who did 401k instead.

I personally think saving the payroll tax today and having control over your money now outweigh the reduction in social security down the road but each person would want to run that calculation themselves.
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Fightin_Aggie
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1:27p, 5/23/25
AG
What is the phase out amount?
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permabull
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In reply to Fightin_Aggie • 1:38p, 5/23/25
AG
Phase out starts at 75k and ends at 100k for individual HSA and twice that for married.
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TXTransplant
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1:48p, 5/23/25
I think the biggest challenge for this is the fact that you have to be on an HDHP in order to contribute to an HSA. That's going to be a hard sell to a lot of people - unless companies do away with every insurance option but the HDHP.

As a side question they didn't change anything about income limits for contributions up to the current max, did they? For example, this year the contribution max for people on family insurance plans is $8550. Will something like this still be an option going forward?

And how are they accounting for the fact that current HSA contribution limits are based on whether you have a self coverage insurance plan or family coverage insurance (and have nothing to do with your tax filing status)? Family plans don't necessarily mean you are filing as a married taxpayer.
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permabull
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1:55p, 5/23/25
AG
As written now, income only impacts the extra contributions above the current limits.
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Kaiser von Wilhelm
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2:00p, 5/23/25
So does this apply the same way for us who are self employed and 1099? Seeing as we pay all the payroll tax side of things, would that still apply then...?
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TXTransplant
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In reply to permabull • 2:21p, 5/23/25
That's good.

But as a first impression, I'm not sure this is going to be very widely used. In part because of the HDHP requirement, and in part because you have to be earning a pretty good income to double your contribution to an HSA, which means you're probably already earning more than the cap. The people earning more than the cap are also most likely the people who are taking advantage of company 401k matches, too (so the company can't put their contribution in the HSA).

I just don't see people making $75k/year being able to contribute $17k+ to an HSA. I make over $150k, and doubling my HSA contribution would be doable, but it would impact my monthly budget (but I am also maxing out my 401k and contributing to a mega backdoor Roth).

And if you can afford it and are below the income limits, if you get a raise mid-year that puts you over, you're not allowed to adjust your contributions. HSA contributions for the year are set at annual enrollment unless you have a life-changing event (birth, death, or marriage). This rule could obviously be changed.

I love the idea of rethinking the rules around our existing savings plans, and this is a good start. I just see some holes from a practical standpoint.

I could see why companies would prefer to put their contributions in this plan rather than a 401k, but I don't think most will be so quick to make that change.

I don't think I'd take an employer contribution to my HSA in lieu of a 401k contribution, a big reason being my investment options on the HSA account are very limited compared to my 401k.
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jpd301
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In reply to TXTransplant • 2:57p, 5/23/25
AG
TXTransplant said:
I don't think I'd take an employer contribution to my HSA in lieu of a 401k contribution, a big reason being my investment options on the HSA account are very limited compared to my 401k.
Sounds like you may have an HSA set up by your employer?

My personal HSA has considerably more investment options than either the HSA my employer offers or my 401k. My 401k has less than 20 funds we can invest in. My personal HSA through Fidelity I can invest in most mutual funds, and I can buy individual stocks. My HSA is way more flexible than anything controlled by my employer.

You should be able to open your own HSA and transfer the funds occasionally from the employer HSA. You may even be able to have the payroll deductions go directly to your personal one instead of the more limited one from the employer but that will vary by employer.


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TXTransplant
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In reply to jpd301 • 3:20p, 5/23/25
What you're describing may be possible. Everything with my company runs through Fidelity, so that's where my HSA is.

But just like my 401k, my investment options with my HSA aren't unlimited. There are only certain funds to choose from.

I kind of figured this was intentional on my company's part - since these funds are intended to cover my family deductible, should we have a major medical event, the idea is to be more conservative with investing them (than say my 401k) because i want the money available should I need it.

That's my personal investment strategy, too. My HSA is more conservatively invested than my 401k, my Roth, or my personal savings.

I honestly don't know my options for rolling it over somewhere else. Frankly, I don't have the inclination (at least not at this time) to get into that.
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Ragoo
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3:32p, 5/23/25
AG
Why do you think the HDHP is a hard sell?
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TXTransplant
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In reply to Ragoo • 3:40p, 5/23/25
Anecdotal with coworkers. Our HDHP was initially free (it's not any more), and even then participation was low. Now it has a cost (although it's significantly cheaper than the next cheapest option).

People like the safety blanket of paying premiums rather than large medical bills and having fixed copays. This may be a generational thing. Most of the coworkers that aren't interested are older than I am (I'm 46). Not sure what younger generations think of it. But the way people of all generations gripe about medical costs, I'm not sure they'd like having to pay OOP for basically everything but preventative care.

Also our HDHP has very limited prescription drug coverage, so if you take expensive prescription drugs, it's not always a great option. Not sure what how much this varies on other HDHPs.
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jamey
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In reply to Ragoo • 3:40p, 5/23/25
AG
Ragoo said:
Why do you think the HDHP is a hard sell?


Because most people just look at how much it cost to go to a Dr, not the fact that they pay that upfront in their paychecks and it's garunteed to come out with a low deductible plan
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EliteZags
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3:46p, 5/23/25
AG
I opened a personal HSA in my Fidelity about a year ago and to transfer a mid 5 figure acct from Optum which was an old company acct with limited fund options, caught a dip in the market and saw it let me invest freely and decided to yolo a large portion of it into tech (PLTR HOOD TSLA SOFI AMZN SMH) and the rest into VOO and RVT for tax free dividends, have close to doubled up since



Quote:
No snark here, honest question (because I stuff away cash in our HSA each year) - what are the rules surrounding its usage when you hit 65? I only know that for now, it can cover medical related costs.

just to add- pay all medical costs with cash as long as you can saving receipts then at any point in the future you can submit them for reimbursement for those costs from the HSA tax free
had that cash been invested it'd be racking up capital gains tax while the HSA was able to grow tax free the whole time
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Ragoo
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In reply to TXTransplant • 3:47p, 5/23/25
AG
TXTransplant said:
Anecdotal with coworkers. Our HDHP was initially free (it's not any more), and even then participation was low. Now it has a cost (although it's significantly cheaper than the next cheapest option).

People like the safety blanket of paying premiums rather than large medical bills and having fixed copays. This may be a generational thing. Most of the coworkers that aren't interested are older than I am (I'm 46). Not sure what younger generations think of it. But the way people of all generations gripe about medical costs, I'm not sure they'd like having to pay OOP for basically everything but preventative care.

Also our HDHP has very limited prescription drug coverage, so if you take expensive prescription drugs, it's not always a great option. Not sure what how much this varies on other HDHPs.
hmmm. I have a HDHP and HSA. Had a stroke Easter Sunday, yes at 39, went to the ER twice and did a ton of testing including 2 night stay in the hospital. Insurance have covered the majority of the bills. The balance I have paid with my HSA up to my yearly deductible. It has truly brought peace of mind to the entire situation knowing I had cash set aside AND a cap on my expenses.
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TXTransplant
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In reply to Ragoo • 3:55p, 5/23/25
Yes, insurance with an HDHP will still cover most of a major medical event. But on my plan, the per person deductible and max OOP is still $4500 ($9000 for family), so that's still on me. I think that scares a lot of people (even though that's exactly what the HSA is for).

But as another poster pointed out, I don't think it's the major stuff that people will object to. It's the every doctor visit (that's not your annual exam). It's the extra imaging or bloodwork your doctor finds at an exam. It's the cost of a minor outpatient procedure - that may not get you to your deductible but is still a 5 figure expense.

And that doesn't even tap into the cost of prescriptions. Some of them can be very expensive on an HDHP.

I think we have way too prevalent of mind set in this country that insurance = free medical care, but I think I'm in the minority.
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TXTransplant
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In reply to EliteZags • 3:59p, 5/23/25
EliteZags said:
I opened a personal HSA in my Fidelity about a year ago and to transfer a mid 5 figure acct from Optum which was an old company acct with limited fund options, caught a dip in the market and saw it let me invest freely and decided to yolo a large portion of it into tech (PLTR HOOD TSLA SOFI AMZN SMH) and the rest into VOO and RVT for tax free dividends, have close to doubled up since



Quote:
No snark here, honest question (because I stuff away cash in our HSA each year) - what are the rules surrounding its usage when you hit 65? I only know that for now, it can cover medical related costs.

just to add- pay all medical costs with cash as long as you can saving receipts then at any point in the future you can submit them for reimbursement for those costs from the HSA tax free
had that cash been invested it'd be racking up capital gains tax while the HSA was able to grow tax free the whole time


This addresses another aspect of the changes that I don't think is a huge benefit. Serious HSA investors that really understand the long-term benefits (like those posting here) probably aren't going to go to the trouble to pull out $500-$1000 from their HSA every year to pay for gym memberships. It's not worth the hassle for the paltry tax savings. You're just gonna leave that money invested and let it grow and pay your gym membership with a credit card that gets you points.

Again, a good idea in concept, but probably not in reality.
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Ragoo
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In reply to TXTransplant • 3:59p, 5/23/25
AG
I guess I don't understand the logic. If you pay monthly for a PPO those dollars are lost forever if you go to the DR or not. There are still copays and other costs the insured bears. With a HDHP your year out of pocket is capped and you have a mechanism to keep your dollars set aside in an account to cover you yearly deductible. You essentially have zero out of pocket cost once your HSA is fully funded (above max deductible).
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TXTransplant
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In reply to Ragoo • 4:01p, 5/23/25
I hear you. That's exactly why I'm on an HDHP.

But people are used to paying insurance premiums. It's what they know. It's not logic, it's emotion and feels.

I also think the average person NOT on an HDHP uses their insurance a lot more than those of us who are on HDHPs.

I also think they truly believe they are receiving medical services that cost in excess of what they pay in premiums and OOP. And they think that because of the ridiculous amounts that are billed to insurance.

What they aren't paying attention to is what is ACTUALLY paid. Or they don't realize that the negotiated rates that the insurance company has apply to you when you pay OOP on an HDHP.

When a doctor bills $500 for an office visit, but insurance only pays $100, that $100 is also what I pay for that visit on an HDHP. I don't think most people on a "traditional" plan even pay attention to what insurance pays. They just see the ridiculously inflated bills and think "phew, I'm glad I have insurance".

But the medical industry (providers and insurance companies) has done a fantastic job of obfuscating the true cost of medical care, and that has people scared.
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permabull
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4:21p, 5/23/25
AG
I also agree it will be hard for most to take advantage of this. Saving 17k in an HSA when your annual income is under $150k is an above average savings rate, if you are also saving 3-6% in your 401k to get the company match and trying to take care of short term savings goals we are talking 20%+ savings rates which is getting into FIRE territory.
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permabull
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In reply to TXTransplant • 4:28p, 5/23/25
AG
TXTransplant said:

I don't think I'd take an employer contribution to my HSA in lieu of a 401k contribution, a big reason being my investment options on the HSA account are very limited compared to my 401k.


When I was at Raytheon my HSA was with Fidelity which was a regular no fee brokerage account you could invest with anything. When I switched to Boeing it was in health equity which was more limited (but has since gotten better with lower fee options) however you can transfer money from HSA to HSA multiple times per year so I would just contribute to health equity to get the payroll deduction then roll it fidelity 2 or 3 times a year.

If you don't like your HSA you can roll it to another provider even while working. The payroll deduction is likely not an issue for you based on your other posts you are likely over the payroll cap anyway.
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Thisguy1
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7:17p, 5/23/25
I knew nothing about HSAs before I started frequenting this board. Why are they such an amazing thing? My mom worked in healthcare all her life and never recommended an HSA over the normal insurance.
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TXTransplant
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In reply to Thisguy1 • 7:43p, 5/23/25
They've only been available since 2004. And if your employer doesn't offer a qualifying HDHP insurance plan, you aren't eligible.
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YouBet
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In reply to Thisguy1 • 8:11p, 5/23/25
AG
Thisguy1 said:
I knew nothing about HSAs before I started frequenting this board. Why are they such an amazing thing? My mom worked in healthcare all her life and never recommended an HSA over the normal insurance.


It's one of if not the most tax advantaged investment vehicle out there. It's basically an extra IRA to save money if you can afford to not use it for healthcare while contributing to it.

Ideally, you have the health plan through work but then have the investment piece outside of work in your own account.
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EliteZags
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In reply to Thisguy1 • 8:16p, 5/23/25
AG
tax free contributions, gains, and withdrawals for med expenses even those occurring in years before withdrawal
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Thisguy1
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8:20p, 5/23/25
But it has to be for medical expenses right? And it's a process where you have to get reimbursed?
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Ragoo
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In reply to Thisguy1 • 8:34p, 5/23/25
AG
Thisguy1 said:
But it has to be for medical expenses right? And it's a process where you have to get reimbursed?
I have a debit card. I pay all my medical expenses right away with it. I don't want to worry about saving receipts and all that jazz.
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jpd301
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In reply to Thisguy1 • 8:42p, 5/23/25
AG
Thisguy1 said:
But it has to be for medical expenses right? And it's a process where you have to get reimbursed?


It does not have to be a reimbursement you can pay directly from it for medical expenses. I have a debit card from my HSA. I generally try to not to use it for little stuff year to year but if we have a big medical expense like a hospital admission we may dip into it occasionally.

At my employer the HSA/HDHP insurance is a no brainer. Employee + family premium is 600 a year for a 5k/10k HDHP and the company contributes $1800 annually to your HSA. The plan is 100% pay after deductible is met so basically you will only spend 5k on any one family member and 10k total. So basically my employer pays me $1200 a year to have my family on the HDHP 5/10 plan. When we have a healthy year we may spend only a few hundred more than the premium so less than a $1000 total. In a bad year we are usually less than 10.

My employer also has a PPO traditional health insurance plan with a $500 deductible before it pays 80%. That ppo offering has a premium that is about 650 a month for a premium so $7800 out of pocket even if you never step foot into a medical office all year.

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kyledr04
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10:01p, 5/23/25
AG
Anyone should be able to have an HSA even without a HDHP.
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JSKolache
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10:05p, 5/23/25
AG
Good news becuase my company is all in on HSAs. We have a HDHP plan and company gives us a sizeable HSA contribution each yr to help out.
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YouBet
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In reply to Thisguy1 • 10:22p, 5/23/25
AG
Thisguy1 said:
But it has to be for medical expenses right? And it's a process where you have to get reimbursed?


No on your first question. You can sit on it until you are 65 and then use it for anything but you will pay income taxes on withdrawals.

So, if you need to you can use it for healthcare expenses, but if you don't have to dip into it for that then it just keeps rolling over and essentially just becomes another pot of savings you otherwise wouldn't have.

So far, we've never had to touch ours so that's $100k sitting in that bucket that we can pull from for healthcare or whatever we would not have had otherwise.
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Petrino1
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In reply to Thisguy1 • 11:10p, 5/23/25
Thisguy1 said:
I knew nothing about HSAs before I started frequenting this board. Why are they such an amazing thing? My mom worked in healthcare all her life and never recommended an HSA over the normal insurance.


To my knowledge it's the only account that offers a triple tax advantage: money is put in pre tax, the investments grow tax free, and no tax paid when you use it for medical expenses.
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