Federal Insurance and Contribution Act (FICA) is a mandatory tax paid by both an employer and an employee. Since HSA and FSA contributions reduce the employee's taxable income, the more employees contribute to these programs, the more employers save.

This post is meant to help you understand and estimate these savings for your organization.

‍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 includes

• Social Security tax: which is 6.2% for employees and 6.2% for employers up to wages of $168,600 (2024 limit).
• Medicare tax: which is 1.45% for employees and 1.45% for employers.

In most cases, employers are paying 7.65% on an employee’s gross pay.

Note that FICA also includes Medicare, but the amounts are usually significantly lower than the two taxes above.

‍How Employers Save on FSA and HSA Contribution‍

When employees choose to contribute to an FSA or an HSA, 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 or HSA is not subject to FICA taxes, and employers do not have to pay the 7.65% FICA tax on these contributions.

This reduction in taxable wages leads to direct tax savings for the employer.

Example

Company X has 1000 employees eligible to either FSA or HSA. Only 50% of eligible employees enrolled in one of the these programs and the average contribution was $1,500 (US Average contribution)

Based on these numbers, the company saved the following amount on FICA taxes (assuming all employees are paid less than $168,600 annually):

1000 (overall employees) * 50% (FSA/HSA participation level) * $1500 (average contribution) * 7.65% (FICA taxes) = $57,375 of annual savings

Plug in your company numbers above and calculate your savings.