The three most common reasons for selecting an FSA vendor are:
- Minimizing vendors
- Lowest price point
- Existing personal relationship
However, the best FSA providers can have significant impact on your employees' ability to save taxes while also reducing your employer’s FICA taxes. In most cases, paying a bit more to a better FSA provider will create a significant return to your business. When selecting a vendor, we recommend to include metrics that can measure the results you are trying to achieve.
Specifically for an FSA provider, a successful FSA implementation will result in:
- The highest number of enrolled employees
- The highest contribution average
- The lowest average forfeited funds
This post explains these metrics and why they provide strong signals on the success of the FSA product your company will use.
Metric #1: Percentage of Enrollees
The majority of FSA providers offer a very similar set of features and services: mobile applications, online claims processes, debit cards, and more. The similarity of the feature set makes it very hard to compare the quality and efficiency of the experience an employee receives through these applications.
The most accurate metric that can provide a good proxy for the overall employee experience is the percentage of enrolled employees, i.e., how many of the employees that are eligible for FSA are actually enrolled.
The US average is 30-40% enrolled into FSA (depending mostly on sector and company size).
Note: Some FSA providers don’t have access to the percentage of enrolled employees, but this question can pivot the discussion toward a mutual goal: to ensure that as many of your employees as possible get and use this benefit. Your broker can probably provide the percentage of enrollees for your company as well as other clients they work with.
Metric #2: Average Contribution
The average contribution amount per participant is another vital metric. Higher average indicate that employees feel confident in the provider’s system and are willing to commit significant portions of their income to their FSA, expecting a smooth reimbursement process. This confidence often stems from positive past experiences and a strong understanding of how to maximize FSA benefits.
The US average for 2024 is $1,440 per FSA account holder, so try to work with providers who have a higher average than the national number.
Metric #3: Average Forfeiture
Finally, inquire about the average forfeiture amount per employee across the provider’s client base. The forfeiture amount—the money employees lose if they don’t use their FSA funds within the plan year—serves as a good proxy for the effectiveness of the provider communication with FSA participants.
Lower forfeiture amounts suggest that the provider offers a user-friendly claims process and robust educational support, helping employees avoid losing money by guiding them to spend their funds appropriately. A provider with a low average forfeiture amount per user is effectively supporting employees in maximizing their FSA benefits, which is the ultimate goal.
According to research conducted across thousands of employees, the average forfeiture is:
- About 25% of employees lose some of their funds every year
- The average amount lost is between $300 and $400
Saving on FICA Taxes
It's important to understand that due to FICA tax savings, the more your employees use their FSA program the more your company save on the FICA taxes. This side benefit will very often offset any additional cost required to support the best FSA for your employees. Below is a quick explanation on how does it work.
What is FICA Tax?
FICA taxes include Social Security and Medicare taxes. These are payroll taxes that both employees and employers must pay on wages. The FICA tax rate includes a Social Security tax, which is 6.2% for employees and 6.2% for employers, as well as a Medicare tax, which is 1.45% for employees and 1.45% for employers.
So, employers are paying 7.65% on an employee’s gross pay up to $168,600 (for 2024).
How FSA Contributions Work
When employees choose to contribute to an FSA, they set aside a portion of their salary before taxes are applied. These contributions are deducted from their gross income on a pre-tax basis, meaning that the amount contributed to the FSA is not subject to federal income tax, Social Security tax, or Medicare tax.
How Employers Save on FSA Contributions
Since FSA contributions are not subject to FICA taxes, the employer does not have to pay the 7.65% FICA tax on the amount that employees contribute to their FSAs. This reduction in taxable wages leads to direct tax savings for the employer.
An example and a basic formula to calculate your companies FICA tax saving can be found at the end of this blog.
When selecting an FSA provider, it's important to prioritize outcomes over cost or vendor reduction. The right provider will significantly benefit both your employees and your business by maximizing tax savings and minimizing forfeited funds. Key metrics to consider include the percentage of enrolled employees, the average contribution per participant, and the average forfeiture amount. These indicators reflect the effectiveness of the provider in enhancing employee experience and ensuring the full utilization of FSA benefits. Additionally, by optimizing FSA contributions, employers can achieve substantial savings on FICA taxes, further enhancing the return on investment for the business.
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