Matchmaker, Matchmaker . . . Match My HSA Contribution

Matching contributions are a great strategy to encourage employees to build their account value. Especially with this twist.

Employer contributions are an important factor in a successful Health Savings Account program. Here are a few important benefits:

• Employees are more likely to complete their account application promptly if they know that the company has set aside money to deposit as soon as the account is opened.
• The company contribution - along with lower employee premium payroll deductions and employee tax savings on their contributions - helps enrollees cover the higher deductible responsibility.
• The company's deposit represents a partnership between employer and employee in paying for coverage (premiums) and care (out-of-pocket expenses for services received).

Most companies do contribute, particularly in the early years. It's easy to fund employer contributions in Year 1 when the company saves, say, $1,600 in premiums and pays 75% of the cost of coverage. The company can contribute most of or all its $1,200 savings to employees' accounts and still hold its spending at the prior year's level.

Few companies offer matching contributions, preferring instead to give a flat-dollar amount, whether it's front-loaded (all deposited at the beginning of the year), split into several periods (semi-annually, quarterly), or doled out per pay period. Yet any company whose employer contributions are governed by a Cafeteria Plan (that's any firm that allows employees to make pre-tax payroll contributions) can match employees' Health Savings Account contributions.

Should they? Let's study this question.

The Case for Matching Contributions in Retirement Accounts

Employers typically offer to match employees' contributions to a qualified workplace retirement plan, up to a certain figure.

Example 1: Continental Flange offers a dollar-for-dollar (100%) match of up to 5% of each employee's income contributed to the company 401(k) plan. An employee who earns $50,000 and contributes at least $2,500 receives a $2,500 company match.

Example 2: Pet Palace matches 50% of each dollar that an employee contributes to her 401(k) plan, up to 8% of her pay. An employee who earns $40,000 and contributes at least $3,200 receives a $1,600 contribution from the company.

The rational is simple: Employers want to encourage employees to save for retirement. Why? The company doesn't want to see its workers destitute when they stop earning income later in life, even though the entity has no legal responsibility for this level of involvement in employees' financial matters.

So, why not simply offer $2,500 or $1,600 (in our examples above) to each employee? Matching contributions require a level of engagement and action by employees. Workers forego free money or an instant return on their money if they don't defer a portion of their income into the company retirement plan. A Continental Flange worker in the example above who planned to contribute only $1,000 might be tempted to stretch her contribution by an additional $1,500, knowing that the extra amount would generate an additional $3,000, not merely her $1,500, deposit into her 401(k) plan.

That's the benefit of matching contributions: Employees who planned to contribute little are given a strong financial incentive to stretch to receive at least the full company match.

The Case for Matching Contributions in Health Savings Accounts

There are two very good reasons to offer a matching-contribution structure with Health Savings Accounts:

First, a matching employer contribution positions the Health Savings Account in the same category as retirement accounts, that is, a long-term savings account to help meet expenses in the future. Yes, Health Savings Accounts deliver tax advantages when reimbursing today's expense as well, but too few owners are maximizing the benefit of their Health Savings Accounts because they see them as immediate reimbursement accounts like a Health FSA and ignoring the long-term benefits. It's important for employees to understand that a Health Savings Account has no time boundary and that it can be used as a retirement medical account with tax treatment superior to any employer-sponsored or personal traditional retirement account.

Second, employees are likely to contribute and save more. The standard employer strategy of a flat contribution - either a lump-sum deposit at the beginning of the year or equal contributions each pay period - doesn't provide any incentive for employees who don't contribute to start or for workers who contribute less than the statutory maximum (the average employee contribution was about $2,150 in 2022) to increase their deposits. Matching contributions, in contrast, nudge employees to contribute more to capture the additional financial reward that the company offers.

In short, the best employer contribution strategy is one that encourages eligible employees to contribute more to their accounts to reduce their taxable income and build medical equity to pay for future qualified expenses. As a bonus to employers, employee contributions aren't subject to federal payroll taxes, so both the company and workers save up to 7.65% on each dollar contributed.

The Case Against Matching Contributions

Here are the arguments that I've heard against offering matching contributions to a Health Savings Account (please add any to the comments section):

It's too complicated. Yes, matching contributions are more complicated than the standard flat-dollar strategy. But most companies an administer matching retirement-plan contributions. The configuration in the payroll system follows the same logic for Health Savings Accounts.

Employees may need money early in the year. Yes, cash flow is important, especially in an employee's first year of participation. Even when the total cost (lower payroll deduction for premiums, employer contribution, tax savings on employee contributions through payroll deductions) of the HSA-qualified plan is less than other plans offered, these savings often accrue over the course of the year. A generous employer up-front contribution can ease cash-flow concerns for employees, particularly those who are newly enrolled in the program.

But companies can adopt other programs and strategies (see some examples here) to address the cash-flow issue and still adopt a matching-contribution program.

Better Than a Pure Match

One of my first Health Savings Account clients developed what I consider an optimal employer contribution strategy. The self-only medical deductible was $1,500. The company covered $1,000 of that amount with a $400 up-front contribution and then $50 per month. The figures were doubled for the family plan.

Why is this strategy optimal? The employer offered a portion of the contribution at the beginning of the plan year to help workers who incurred high expenses early. It then required employee engagement and action to receive the balance of the company's contribution.

By depositing a portion of the employer money up-front without any employee commitment to contributing, this approach weakens somewhat employees' incentives to stretch the amount of their payroll deposits. But it helped with cash-flow at a time when federal tax law limited the tools that companies could offer to help employees with a first-year cash crunch. That trade-off seemed worthwhile then. The introduction of new tools to manage high expenses reduces the financial benefit of this approach somewhat. But it offers a certain psychological benefit for employees to see an instant balance in their account at the beginning of the plan year that may offset the slightly reduced incentive to stretch their personal contribution.

The Bottom Line

Matching contributions are a very underutilized tool to promote employee engagement and spur higher contribution rates. A company that offers matching contributions to its retirement plan should carefully examine its Health Savings Account contribution strategy to determine whether the same approach would yield similar results in their Health Savings Account program.

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The content of this column is informational only. They are not intended, nor should the reader construe the content, as legal advice. Please consult your personal legal, tax, or financial counsel for information about how this information applies to you or your entity.