The importance of educating employers on HSA program FICA savings
Despite continued strong growth and a steady increase in consumer demand for health savings accounts, some employers—even those that already offer an HSA-eligible high-deductible health plan—still struggle to see the value in offering an employer-sponsored HSA program to their employees.
Oftentimes, these employers are either unaware or misinformed about the potential FICA tax savings they're leaving on the table, among the many other benefits they and their employees are missing out on.
Now more than ever, employers need to understand the direct financial benefit they stand to earn through FICA tax savings—savings they can only achieve by offering an HSA program.
HSAs provide substantial tax savings for employers and employees
The Federal Insurance Contributions Act—commonly known as FICA—is a U.S. federal payroll tax applied to both employers and employees. The FICA tax rate for 2021 for both employers and employees is 7.65%. Of that percentage, 6.2% is earmarked for Social Security, while the remaining 1.45% goes to Medicare.
By setting up an employer-sponsored HSA program and providing their employees with an easy way to make pretax HSA contributions through payroll deductions, employers lower both their own and their employees' FICA tax liability. By reducing the amount of income that applies to FICA taxes, employers directly save the 7.65% on any pretax employee contributions made through their HSA program.
Important to note on the employee side, one of the elements that makes HSAs so unique and tax-advantaged is that on top of lowering overall taxable income, employee pretax contributions are also not subject to FICA taxes. HSAs are one of the only tax-advantaged accounts that offer this added financial benefit. Even pretax 401(k) contributions are still subject to FICA taxes. And though IRA contributions can be described as "before-tax," employees have already paid FICA taxes on those contributions.
Do the math to show the savings
While it's important for employers to understand the basics of what FICA is and how they can save in FICA taxes through an employer-sponsored HSA program, oftentimes, providing a quick example is all that's needed to make it "click."
Say an employer has 50 employees who each contribute $2,000 a year to their HSA through pretax payroll deduction contributions. Through those contributions alone and using the FICA tax rate of 7.65%, the employer will save $7,650 in FICA taxes annually. Their FICA savings alone more than covers any cost of offering an employer-sponsored HSA program. Even if they pay $2.50 per account per month, or $1,500 annually, they still save $6,150 just by offering an HSA program.
The numbers speak for themselves. Not offering an employer-sponsored HSA program can negatively impact employer finances. Not to mention create recruiting and retention issues, as well as lost time and headaches dealing with employee questions and confusion surrounding finding their own HSA provider or not even having the option to open an HSA.
The more employees contribute, the more employers save
Ultimately, employer FICA savings potential is directly tied to employee engagement in their employer-sponsored HSA program. Simply put, employers save more money the more their employees contribute to their own HSAs.
So, while choosing to move forward with an HSA program is an excellent first step, employers need to understand upfront that choosing the right HSA partner is critical to build the best HSA program for their business and maximize employee engagement from the onset to drive the most FICA savings and win-win benefits.
If we revisit the example above, but the employer leverages a leading-edge HSA program and is able to boost employee contributions to an average of $3,000 per year per employee, they'll save an additional $3,825 annually, just by choosing the right HSA partner.
HSAs offer employers more than just FICA savings
Beyond FICA savings, when employers set up a well-planned HSA program, they complete the HDHP/HSA puzzle and provide their employees with a valuable benefit to save money in taxes, better control their short and long-term health care costs and invest in their future. All this equals a powerful recruitment and retention tool—especially if employers choose to make a contribution to employee HSAs.
The benefits on the employee side also result in more motivated, less financially stressed employees and an overall more productive, happier workforce. And the ability to streamline benefit offerings through the easy integrations, administrative automations and other features offered by a leading-edge HSA provider can save employers and employees both time and headaches.
Choosing the right HSA partner is key to maximizing win-win benefits
Not all HSA providers are created equal, and there's a lot more to consider than fees alone. From program implementation, enrollment and administration, to employer and employee resources, support and overall ease of use, it pays dividends—in FICA savings and beyond—to partner with a provider that specializes in HSAs, makes it easy for everyone to maximize HSA benefits and has a proven track record of increasing employee engagement.
With the right partnership, employers can create a successful HSA program, achieve optimal employee engagement and make maximum FICA savings a reality.
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