HSAs vs. 401(h): Healthcare Planning Many CPAs Overlook

Healthcare is one of the largest and least planned-for retirement expenses. Fidelity’s long-running estimates routinely show six-figure lifetime healthcare costs for retirees, yet most tax planning conversations still focus primarily on income taxes, entity structure, and retirement accumulation.

For CPAs advising profitable business owners, healthcare planning is not just a personal finance issue. It is a tax strategy opportunity.

Two tools often enter this conversation: the Health Savings Account (HSA) and the 401(h) medical benefit account. While both provide tax-advantaged ways to pay for medical expenses, their planning value, contribution capacity, and ideal use cases differ dramatically.

Understanding these differences allows CPAs to bring more consultative, high-value ideas to clients and deepen their advisory relationships.

What is an HSA?

A Health Savings Account is a personal, tax-advantaged account available to individuals enrolled in a high deductible health plan.

Key features

• Contributions are pre-tax or tax deductible
• Growth is tax deferred
• Qualified medical distributions are tax free
• Funds are individually owned and portable

For 2026, family contribution limits are under five figures annually, making HSAs useful but inherently capped tools. Typical family limits are in the range of $8,750 per year.

Ideal use case

HSAs are well suited for:

• Individuals and families covering current or near-term medical costs
• Employees building a modest healthcare reserve
• Clients who value flexibility and simplicity

They are excellent foundational tools but limited as a large-scale tax planning strategy for highly profitable business owners.

What is a 401(h) plan?

A 401(h) plan is a medical benefit account that can be embedded within a qualified retirement plan, typically alongside a defined benefit or pension structure. It is designed specifically to fund retirement healthcare expenses with pre-tax dollars.

Key features

• Contributions are made with pre-tax business dollars
• Contributions are deductible to the business
• Assets grow tax deferred
• Qualified medical distributions in retirement are tax free
• Funding levels can be significantly higher than HSAs

Properly structured, annual contributions can range from tens of thousands to well into six figures. Many designs allow approximately $30,000 to $160,000 or more per year depending on plan structure and demographics .

Ideal use case

401(h) arrangements are most effective for:

• Highly profitable business owners
• Clients already utilizing defined benefit or cash balance plans
• Owners seeking large, legitimate deductions
• Clients focused on long-term tax minimization and wealth building

In short, this is not an “every taxpayer” strategy. It is a targeted tool for the right profile.

Strategic comparison: HSA vs. 401(h)

From a CPA’s perspective, the distinction is not which is “better,” but which is appropriate for the client’s situation.

Contribution capacity

HSAs are inherently limited by annual statutory caps. They are helpful but small in scale.

401(h) plans can offer materially larger funding capacity, often many multiples of HSA limits .

Tax leverage

HSAs provide strong triple tax benefits, but on relatively small dollars.

A 401(h) can pair those same tax characteristics with meaningful business deductions and larger funding levels, creating a more impactful planning lever for high-income owners .

Planning depth

HSAs are simple and accessible.

401(h) plans require coordination with actuaries, TPAs, and investment advisors. They are strategies that must be designed correctly to remain compliant and a specialist consultant is the best way to ensure they are implemented and successfully maintained.

Why this matters for CPAs

Many profitable business owners are already maxing out common strategies. They fund 401(k)s, implement cash balance plans, and optimize entity structures. Yet healthcare, one of the largest future expenses, is often funded later with after-tax dollars.

A properly designed 401(h) arrangement allows business owners to:

• Convert a future personal expense into a current business deduction
• Reduce current taxable income
• Systematically build a dedicated healthcare pool
• Enhance overall retirement security

For CPAs moving toward advisory models and value-based billing, these types of strategies shift the conversation from compliance to proactive planning.

They also naturally create ongoing touchpoints, since plan design, funding, and coordination require annual review.

The importance of specialist collaboration

401(h) plans are not DIY strategies. They intersect with:

• Qualified plan rules
• Actuarial calculations
• Nondiscrimination requirements
• Plan document design
• Investment management
• Distribution compliance

Improper setup can create compliance risks or reduce effectiveness.

That is why many CPAs choose to partner with specialists who focus on advanced retirement and benefit plan design. The CPA remains the client’s primary tax advisor while leveraging expert resources for design and implementation.

This collaborative model allows CPAs to:

• Deliver cutting-edge strategies
• Protect clients from technical missteps
• Expand advisory revenue opportunities
• Strengthen client loyalty

The bottom line

HSAs remain a valuable tool and should not be ignored. But for the right business owner, they are often just the starting point.

A 401(h) plan, when paired with the appropriate retirement plan structure, can transform healthcare planning into a meaningful tax and wealth strategy, using pre-tax business dollars today instead of after-tax personal dollars tomorrow .

For CPAs serving profitable owners, understanding and identifying when to explore this strategy can materially enhance the value you bring to clients.