The rule of thumb for helping employees choose how to allocate workplace savings between a 401(k) account and a health savings account is relatively straightforward: 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.
The rule of thumb works well, according to financial advisers — until it doesn't.
There are plenty of gray areas that can topple the logic or at least make it murky, advisers said, since the ultimate answer depends in large part on behavioral economics, a topic that hasn't been well studied when it comes to HSA savers.
"I think we're just scratching the surface on behavior inside HSAs," said Jania Stout, managing director and co-founder of Fiduciary Plan Advisors. "Now that balances are getting bigger, I think people are starting to pay attention more."
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Let's first look at some nonbehavioral elements. For example, what if an employer doesn't offer a 401(k) match? That's the case for roughly 14% of 401(k) plan sponsors, according to the Plan Sponsor Council of America.
Advisers seem to agree that in this scenario, employees should first save in an HSA. The HSA offers a triple tax benefit (tax-free contributions, investment growth and withdrawal if used for medical purposes) whereas a 401(k) only offers two of those benefits (tax-free contributions and growth, in the case of a traditional 401(k)).
"It's a better benefit for you," Jason Chepenik, managing partner of advisory firm Chepenik Financial, said of HSAs. "It's tax-free all the time."
The rule of thumb also overlooks a glaring reality: Many average and low-income earners may not be able to afford to stash away much money.
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If an employee can only manage to save a few thousand dollars a year, for example, and doesn't have much already saved in an HSA, it likely makes sense to save first in an HSA, at least up to the employee's annual deductible for health expenses, according to Aaron Pottichen, senior vice president at Alliant Retirement Consulting.
The average deductible for workers with family coverage is roughly $4,700 for an HSA-qualified high-deductible plan, according to the Kaiser Family Foundation.
By comparison, saving first in a 401(k) would typically make sense for a high earner with $10,000 already saved in an HSA, Mr. Pottichen said.
There are many other considerations that could tilt the scales. Since advisers advocate investing HSA money rather than saving it in an HSA's bank-like account, in order to achieve higher tax-free growth, examining investment options is a must, Ms. Stout said. Are the funds as attractive as they are in the 401(k) plan? Are clients being gouged by HSA fees? These factors could erode the tax advantages of an HSA over time.
In addition, what's the client's projected tax rate going to be in the future? If a client's annual retirement income is projected to be in the six figures, being able to shield withdrawals from a likely higher tax rate could make an HSA more advantageous than a 401(k), especially if a Roth 401(k) option isn't available.
However, the behavior of savers could upend that logic and make a 401(k) the better option, advisers said.
The knee-jerk reaction of many savers faced with a large health expense is to immediately cover the cost with HSA savings, rather than paying out of pocket now and investing the money to use in retirement, when health costs will likely be greater. Only $13.8 billion of the roughly $64 billion in HSAs is invested, with the remainder held in readily accessible deposit accounts, according to consulting firm Devenir Group.
There are hardly any guardrails in place when it comes to HSA savings, advisers said. Participants in 401(k)s can only access their money penalty-free prior to age 59½ by taking a loan or hardship withdrawal, but there are hardly any road blocks in place for HSA savers.
Ms. Stout, for example, recently met with an individual who'd purchased high-end eye glasses, rather than more reasonably priced ones, due to the ready availability of HSA funds.
"Now you're living beyond your means through your HSA," said Ms. Stout. "HSA people have to be more disciplined, because they don't have as many guardrails as we have in the 401(k) system."
The 401(k) plan may therefore make sense for heavy or undisciplined spenders who'd likely tap into their HSAs for perhaps unwarranted reasons, advisers said.
"What's nice [for advisers] is it's art, not science," Mr. Pottichen said of the 401(k) versus HSA decision.