The moment a new law is enacted, someone is wondering if there is a way to take advantage of it. This dynamic is frequently seen in financial regulation. Lawmakers use taxes and incentives to generate revenues and influence group behaviors, but since there is rarely full knowledge beforehand as to how the populace will respond, every new regulation comes with the prospect of unknown consequences—and sometimes, opportunities.

A current example of uncovering unexpected opportunities can be found in Health Savings Accounts, and changes resulting from the Patient Protection and Affordable Care Act (PPACA).

Introduced in 2003, Health Savings Accounts currently permit individuals with qualifying high-deductible health insurance plans to contribute up to $3,350 annually on a pre-tax basis for anticipated out-of-pocket medical expenses (the threshold is $6,750 for a family, with an additional $1,000 if over age 55). Any earnings on the deposits are tax-free, as are withdrawals—as long as the money is used for qualified medical expenses. In addition, unused balances are allowed to accumulate. After age 65, HSA funds can also be used to pay insurance premiums, including Medicare and long-term care insurance.

Similar to an IRA or other qualified retirement plan, withdrawals for other purposes are taxable as regular income. However, if funds are withdrawn before age 65 for non-medical reasons, a 20 percent penalty is applied.

On introduction, the HSA was sort of a “niche” program, intended to defray medical expenses for households without comprehensive coverage, usually the self-employed or those working for smaller companies that didn’t provide employer-sponsored health insurance. That changed with the passage of PPACA.

Although PPACA was signed into law in 2010, several provisions did not take effect until January 2014, including the mandate that all individuals not covered by an employer-sponsored health plan, Medicaid, Medicare or other public insurance programs had to secure an approved private-insurance policy or pay a penalty. Combined with a provision that insurers could not decline applicants based on pre-existing conditions, many more Americans found themselves either maintaining or buying health insurance at significantly higher rates compared to previous years. Faced with rising premiums, some opted for higher-deductible plans. This approach reduced premiums (although most were still higher than before) but left individuals with greater financial exposure; potential out-of-pocket costs were higher.

Almost immediately, the HSA received increased attention as the affordable complement to high-deductible insurance coverage. This increased awareness also sparked some other non-health insurance observations: a few financial experts came to the conclusion that an HSA could be a better retirement vehicle than an IRA. In a March 2014 article, Retirement Management Analyst Dana Anspach called the HSA an “IRA on steroids,” explaining:

“Where else do you get to contribute tax-deductible dollars and withdraw them tax-free? Health insurance premiums and medical expenses of some kind are a certainty. Why not pay for them with tax-free dollars? I can think of almost no downside to funding an HSA instead of an IRA. If you don’t need your HSA funds for medical expenses or insurance premiums then after age 65, you can use the money just like funds in your IRA or 401(k).”

Besides the increase in households buying individual high-deductible health insurance, HSA eligibility got another boost. Premium increases prompted some larger companies to manage costs by replacing comprehensive medical coverage with high-deductible health plans for their employees, sometimes including an allocation to fund an accompanying HSA. And that got some creative thinkers wondering…

Could an HSA be better than a 401(k)—even with an employer match?

In the January 2016 Journal of Financial Planning, University of Missouri professor of accounting Greg Giesler published an article titled “Could a Health Savings Account Be Better Than an Employer-Matched 401(k)?” The professor’s answer: Yes, most definitely.

Because of its substantial tax savings at contribution, and no tax cost at distribution, Giesler calculates an HSA has a much higher after-tax future value (ATFV) in comparison to a 401(k), where contributions are deductible but distributions are taxable. Even when an employer matches a portion of a worker’s 401(k) contributions, the ATFV of an HSA is still higher under most circumstances. A 401(k)’s advantage is greater only if the employer makes a 100 percent match on employee contributions. In all other circumstances, in every marginal tax bracket, the HSA prevailed.

Giesler also observes that the comparative tax savings between a 401(k) and a Roth 401(k) are primarily dependent on whether the tax rate at distribution is higher or lower than the rate when the funds were deposited. A higher future tax rate favors the Roth account, where deposits are made with after-tax dollars, with growth and distribution tax-free. A lower future tax rate makes a 401(k) attractive because of the deduction on deposits.

Mainstream personal finance commentators may still see the 401(k) as a default funding priority, but a number of experts who have run the numbers say things have changed. As Geisler says near the end of his article:

“The emergence of HSAs requires reexamining the traditional financial-planning advice to first take advantage of the maximum employer-matching contribution to an employee’s 401(k).”

During the debate over PPACA, Nancy Pelosi, the Speaker of the House, said “We have to pass the bill so that you can find out what’s in it.” She probably wasn’t thinking that one of the “finds” would be a tax-free “super account” that might be more attractive than an employer’s 401(k). But then again, you never know what might come from new financial legislation, especially after some inquisitive, outside-the-box thinkers have a chance to dig into the details.

By Elozor M. Preil

Elozor Preil, RICP®, CLTC is Managing Director at Wealth Advisory Group and Registered Representative and Financial Advisor of Park Avenue Securities LLC (PAS). He can be reached [email protected]. See www.wagroupllc.com/epreil for full disclosures and disclaimers. Guardian, its subsidiaries, agents or employees do not give tax or legal advice. You should consult your tax or legal advisor regarding your individual situation.