Employer matching worked because it dialed into some fundamental truths in behavioral economics: left to their own devices, most people don't build savings for either retirement or health care. (Image: Shutterstock)
Organizations are once again gearing up for open enrollment. This time, though, they're doing it under tumultuous circumstances.
Recommended For You
The COVID-19 pandemic has heightened the perennial concerns of open enrollment: managing rate increases and delivering valuable benefits. In this environment, optimizing benefits to cut costs and help employees build long-term savings is critical.
The market has nearly perfected how to do this for retirement benefits. Leveraging the lessons of behavioral economics, the market has coalesced around a 401(k) structure that includes an employer matching component – one designed to limit costs and incentivize employee participation.
Most organizations haven't optimized health savings account (HSA) strategy, however. Instead of conditioning some or all of their financial contributions on employee activity, many employers choose to seed employee HSAs with a fixed amount.
This lack of symmetry has always been puzzling – after all, the HSA is another vehicle with profound savings utility. With evidence to suggest that employer matching drives similar, if not better, results in HSAs, why isn't it being adopted just as broadly?
The benefits of the employer match in 401(k)s are well understood
From the beginning, employer contributions to 401(k)s have operated on a matching basis. Rather than dedicating a no-strings-attached sum to employee accounts, organizations commit to match employee contributions up to a certain percentage of the employee's income.
This contribution strategy helped push the 401(k) to popularity. Because the employer match limited costs, retirement benefits became more fiscally manageable than they were under employee pension plans. Employer matching also encouraged employees to take an active role in planning for their own retirement.
Employer matching worked because it dialed into some fundamental truths in behavioral economics. Left to their own devices, most people don't build savings for either retirement or health care. In fact, 65% of Americans save little or nothing because short-term rewards are more motivating than long-term ones. To counteract that, employer matching provides a clear financial stimulus: Employees don't want to leave money on the table.
The result is greater adoption and higher contributions. Today, 75% of employers that offer a 401(k) contribute funds based on a match.
The employer match drives similar results in HSAs
Despite similarities between the 401(k) and the HSA, very few organizations adopt a similar contribution strategy. Instead, their approach is more reminiscent of employee pension plans: They seed HSAs with a certain guaranteed amount of funding each year. This strategy fails to tap into the basic behavioral economics principles that make 401(k) matching so successful.
According to HealthEquity internal client data, matching HSA contributions leads to the same positive outcomes organizations see with 401(k) matches. Nearly 80% of HealthEquity clients that use a match enjoy lower overall contribution costs, saving them on average 13% more compared to organizations that use a seed-only strategy.
Employees are also more likely to contribute to their HSAs when their organization includes a match. On average, 22% more employees contribute compared to employees whose organization uses a seed-only approach.
Finally, employer matching almost always leads to higher employee contributions. HealthEquity clients using a match strategy see employees contribute 35% more than the employees of their peers taking a seed-only approach.
Employer matching in HSAs carries an additional benefit
Using an employer match strategy in HSAs also realizes an important additional benefit: greater tax savings. (HSAs are never taxed at a federal income tax level when used appropriately for qualified medical expenses. Also, most states recognize HSA funds as tax-deductible with very few exceptions. Please consult a tax advisor regarding your state's specific rules.)
Employee HSA contributions achieve additional tax savings that are not experienced with employee contributions to 401(k)s. In fact, both employees and employers save on Social Security and other taxes when employees contribute to HSAs.
By adopting a match strategy that encourages greater employee contributions, employers offering a match save more in taxes for both their organization and their employees.
Bottom line: Consider an HSA contribution matching strategy
The 2020 open enrollment season presents unique challenges that won't be answered with the same suboptimal approaches. To satisfy budget demands and generate better results for employees, organizations should consider an HSA match strategy that reflects the same approach used in the retirement space.
The data is clear: employer matching generates lower costs, fewer taxes, greater participation rates and higher account balances – all crucial elements to a successful strategy in uncertain times.
Dr. Steve Neeleman is founder and vice chair of HealthEquity. Nothing in this communication is intended as legal, tax or financial advice. Always consult a professional when making life-changing decisions.
Read more:
© 2025 ALM Global, LLC, All Rights Reserved. Request academic re-use from www.copyright.com. All other uses, submit a request to [email protected]. For more information visit Asset & Logo Licensing.
