Open Enrollment for High Earners: The HSA as an Investment Account and the Mega Backdoor Roth

Open enrollment decisions made this fall set up the 2027 plan year, and two of them involve accounts that high earners often examine closely: the health savings account (HSA) and the after-tax 401(k) feature known as the mega backdoor Roth. This article explains what each requires, how the HSA can function as an investment account, and why the mega backdoor Roth depends on specific plan features that your employer may or may not offer.

What it takes to be HSA-eligible

An HSA is available only to someone covered by a qualifying high-deductible health plan (HDHP). For 2027, the IRS defines an HDHP as a plan with an annual deductible of at least $1,750 for self-only coverage or $3,500 for family coverage, and with out-of-pocket costs capped at $8,700 or $17,400 (Revenue Procedure 2026-24). Eligibility is tested month by month: you must be covered by the HDHP on the first day of the month, have no disqualifying other coverage, not be enrolled in Medicare and not be claimed as someone else’s dependent.

The 2027 contribution limits are $4,500 for self-only coverage and $9,000 for family coverage, with an additional $1,000 for people who reach age 55 by the end of the year. Employer contributions count toward the same limit. If you are eligible on December 1, the last-month rule treats you as eligible for the full year, but you must remain eligible through a 12-month testing period or the contributions made only because of that rule become taxable income and carry an additional tax.

An HDHP shifts more of the first dollars of medical cost to you. Whether that trade makes sense depends on your expected health care use, the premiums and benefits of the other plans offered, and the cash you hold to cover a deductible.

How an HSA is taxed

Contributions are deductible, or excluded from income when made through an employer cafeteria plan. Earnings inside the account are not taxed. Distributions used for qualified medical expenses are not taxed. Distributions for anything else are included in income and, before age 65, carry a 20% additional tax. The additional tax does not apply after age 65, disability or death. Texas has no state personal income tax, so the federal treatment is the main consideration for Texas residents.

Investing the balance or spending it

The balance stays in the account from year to year; there is no requirement to use it by year-end. IRS guidance allows HSA funds to be invested in investments approved for IRAs, although the custodian’s agreement may restrict the choices, and many custodians set their own minimum balances or menus. That is a provider decision, so compare the fees and options of the HSA your employer offers.

Reimbursement timing matters here. IRS Notice 2004-50 says an expense incurred after the HSA was established can be reimbursed in a later year, and it sets no time limit. Some account holders pay current medical costs from other funds, keep the receipts and leave the HSA invested. Others use the account as a spending account. Both are permitted, and each has different effects on liquidity and record keeping.

What the mega backdoor Roth requires

The overall limit on additions to a defined contribution plan under Section 415(c) is $72,000 for 2026. It counts employee deferrals, employer contributions and any after-tax employee contributions, and it is the lesser of the dollar limit or 100% of compensation. The 2026 employee deferral limit is $24,500, and catch-up contributions sit on top of the overall limit. The IRS has not announced the 2027 amounts as of this writing, so this article does not rely on them.

The mega backdoor Roth uses the room between deferrals and the overall limit. It requires all of the following:

• a plan that permits after-tax (non-Roth) employee contributions;
• either an in-plan Roth conversion of those contributions, or an in-service withdrawal that can be rolled to a Roth IRA, both of which the plan must allow;
• enough room under the overall limit after your deferrals and any employer contribution.

The conversion is taxed on the value less your basis, so earnings that build up before conversion are taxable. When a plan pays out pre-tax and after-tax amounts together, IRS Notice 2014-54 lets the recipient direct the after-tax amounts to a Roth IRA and the pre-tax amounts to a traditional IRA, and amounts moved into a designated Roth account in the plan remain subject to the plan’s distribution restrictions. Nondiscrimination testing of after-tax contributions can also affect what higher-paid employees are allowed to contribute. The plan’s summary plan description and the plan administrator can say what the plan permits. Many plans do not offer these features.

Before open enrollment closes, review the plan options with your adviser and your tax professional, who can confirm how these features fit your tax situation and your employer’s plan documents.

This article is provided by Austin Wealth Management for general educational purposes only. It is not financial, investment, tax or legal advice, it does not consider your individual circumstances, and it does not create an advisory relationship. Austin Wealth Management provides advice and services only under a signed advisory agreement, and the terms of that agreement govern. Rules and limits change, so information here may not be current. Consult a qualified financial professional before making financial decisions.