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HSA Heuristics


There is No Contribution “Rule of Thumb” That is Best for Everyone

A heuristic technique is any approach to problem solving or self-discovery that employs a practical method, not guaranteed to be optimal, perfect, or rational, but instead may be sufficient to make an immediate decision. These are mental shortcuts we use to ease the cognitive load of decision-making – a rule of thumb, an educated guess, an intuitive judgment, guesstimates, profiling or common sense.

Some believe that the “rule of thumb” when it comes to deciding on the order for contributing to a 401(k) or HSA is: “ Save up to the percentage of the employer's 401(k) match to take advantage of ‘free’ money, max out savings in an HSA, and then save more in a 401(k) if anything is left over.”1 However, because of variations in plan designs and provisions, as well as the diversity in participant finances and needs, there is no good heuristic for decision-making that applies to all HSA participants.2

However, nothing stops you, the plan sponsor, from suggesting workers consider a prioritization based on your own plan design. Consider deploying automatic enrollment/escalation defaults – yes, automatic enrollment and escalation features can be applied to cafeteria plan elections of HSA contributions.

  • Employer contribution design (match, non-elective, comparable) and timing (per payday, year-end, “front-loaded”, etc.), and
  • Liquidity options (plan loans, hardship withdrawals, eligible expenses) and timing (starting the clock on eligible expenses).

3 Where you offer both a 401(k) and an HSA-capable health option, you should consider the following factors in establishing an order of contributions or “default” automatic enrollment, escalation features:

Whether or not there is an employer contribution to either the 401(k) or the HSA, the participant should almost always give priority to opening the Health Savings Account – a contribution is typically required. This starts the clock on medical expenses eligible for tax-preferred reimbursement. Like ZEBRAs of olden days,4 a participant need not contribute money to the HSA in advance of incurring the expense – so long as the HSA account has been opened.

Max Out

The only “rule of thumb” that does apply to everyone is to “max out” contributions to both the 401(k) and the HSA. The future is guaranteed to no one. American’s median tenure has historically been less than five years. So, workers should maximize contributions to both the 401(k) and HSA. Maxing out contributions is the savvy “rule of thumb” given employment patterns in America – almost all workers will have a period of unemployment, a period in the “gig” or “contingent worker” economy, a period of disability, and/or a period of employment where their employer does not offer a 401(k) or an HSA or doesn’t offer either. Few can afford to forego the tax preferences and employer financial support that are only available in a 401(k) or HSA.

When Maxing Out Isn’t Practical or Possible – Next Best is to Garner the Full Employer Financial Support

If there is employer financial support for the 401(k) (match, non-elective, etc.) or the HSA (comparable, matching, etc.), the savvy “rule of thumb” is to contribute as necessary to garner the maximum employer financial support as early in the plan year as possible in each of the two programs. Sometimes, where the HSA provides for a comparable employer contribution, it makes sense to contribute/open the HSA first.

If you adopt automatic features, be sure that any worker defaulted into the HSA and/or 401(k) will contribute enough to receive the full employer financial support from both plans/programs.

Living Paycheck to Paycheck

Where you decide against automatic features, or where workers decides to opt out of contributing to the 401(k) or the HSA, you will want to guide them into considering the best contribution solution. For those living paycheck to paycheck, you may want to have them consider:

  • The need for saving in the Health Savings Account in anticipation of satisfying the deductible, and
  • Levering liquidity provisions in the 401(k) plan (specifically, plan loans) both in terms of meeting short-term financial needs/emergencies/deductibles AND funding the HSA.5

Two Final Thoughts

First, note that consistently, year after year, a super majority of American workers receive a federal income tax refund.6 Almost always, a better option for your workers who live paycheck to paycheck would be for the worker to make elections that would direct the refund they would have received next year into the 401(k) or HSA now, in the current year, throughout the year. Why forego the tax preferences and employer financial support common to 401(k) plans and HSAs so you can give the IRS an interest free loan?

Second, HSAs account holders need not leave their money in the HSA account selected by the (current or prior) employer to receive the contribution via the cafeteria plan. The HSA owner is free to move the money at any time. And, with that in mind, you should be looking at HSA trustees who place a priority on soliciting HSA account owners to aggregate/consolidate their HSA assets into a single account, as many HSA accounts require a minimum balance before an individual can invest.

Finally, frequent outreach is recommended to every worker who is not receiving the maximum value from your investment, your decision as a plan sponsor/employer, to offer and maintain both a 401(k) and HSA.

1G. Iacurci, The 401(k)-HSA savings rule of thumb works, until it doesn't. Behavioral and other elements could tilt the scales. Investment News, 9/26/19, Accessed 9/27/19 at:
2J. Towarnicky, “HSAs Chicken” or 401(k) “Nest Egg”, Which Comes First? 1/19/18, Accessed 9/29/19 at:
3DOL Advisory Opinion 2008-02A, 2/8/08, Accessed 9/29/19 at: See also: Revenue Ruling 2002 – 27, 5/20/02, Accessed 9/29/19 at:
4Zero Based Reimbursement Accounts. In an IRS News Release, February 10, 1984, the IRS first announced that so-called "zebra" plans and "flexible spending accounts" were not regarded as bona fide cafeteria plans. See: L. Irish, “Cafeteria Plans in Transition”, (1984). William & Mary Annual Tax Conference. Accessed 9/29/19 at:
5Note I, Supra.
6In each of the past six years, there have been 109+MM federal income tax refunds averaging $2,800+:
• As of November 23, 2018, of the $154+ MM 2017 federal income tax returns processed, 111.9+MM generated a refund that averaged $2,899, where 90.1MM of those refunds were direct deposited.
• As of September 1, 2017, there were 145.3MM 2016 tax returns, 108.7MM processed generating a tax refund that averaged $2,782, where 88.1MM refunds were directly deposited.
• As of December 30, 2016, there were 152.5MM 2015 tax returns, 111.1MM refunds, averaging $2,860.
• As of December 25, 2015, there were 151.0MM 2014 tax returns, 109.4MM refunds, averaging $2,797.
• As of December 26, 2014, there were 149.7MM 2013 returns, 109.5MM refunds, averaging $2,918.
• As of December 27, 2013, there were 148.2MM 2012 returns, 109.6MM refunds, averaging $2,929. Internal Revenue Service, Accessed 9/29/19 at: