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More Employee HSA Contributions, More Employer FICA Savings

May 19, 2021 8:00:00 AM

Employee benefits continue to play an increasingly important role when it comes to recruitment, retention, employee wellness, productivity and beyond. And in the employee benefits conversation, health savings accounts often take center stage, particularly due to their unique ability to help save employees money in multiple ways, while also allowing them to take a more active role in their healthcare and providing them with a long-term investment vehicle.

Health savings accounts continue their rapid rise. The latest HSA market research shows the total number of HSAs surpassing 31 million accounts nationwide, with total HSA assets exceeding $87 billion.

But while the numbers paint a telling picture, and while consumer and employee demand for HSAs steadily increases—with 70% of employees defining benefits as either the most important or a very important factor in accepting or continuing a job—some employers still struggle to see how setting up an employer-sponsored HSA program actually benefits their business.

With the focus most often employee-centric and revolving around how HSAs benefit their individual accountholders, employers are sometimes unaware or misinformed about the potential FICA tax savings for their business they’re leaving on the table by not offering an employer-sponsored HSA program, among the many other benefits they and their employees are missing out on.

Offering employees an employer-sponsored HSA program through the right HSA partner provides a variety of win-win benefits for employers and employees alike—not to mention substantial FICA tax savings. And the more employees contribute to their HSAs, the more they and their employer save.

Employees AND Employers Can Both Save Money Through HSAs

HSAs are often promoted to end users based on their unique “triple tax advantage.” Essentially, for HSA accountholders, HSA contributions aren’t taxed, HSA funds grow tax-free and all withdrawals for HSA-qualified expenses are also free from any taxes.

The HSA triple tax advantage is great for individual accountholders, but what about for employers? What incentive does an employer have to go through the process of offering an employer-sponsored HSA program to their employees?

While there are numerous reasons all employers should consider offering an employer-sponsored HSA program, one financial benefit reigns supreme—FICA tax savings for the employer.

The Federal Insurance Contributions Act—commonly known as FICA—is a U.S. federal payroll tax applied to both employees and employers that helps fund Social Security and Medicare. FICA taxes are mandatory, barring a few exceptions, and are deducted from each employee paycheck. Employers share in FICA taxes by paying a matching deduction to the amount each of their employees is taxed each paycheck.

For 2021, the FICA tax rate for both employers and employees is 7.65% each and is based off an employee’s gross taxable wages. It’s important to note, employers are responsible to match each of their employees’ FICA tax liabilities—7.65% paid by the employee and 7.65% paid by the employer—totaling 15.3%.

Since both employees and employers incur FICA taxes on each employee paycheck, regardless of the number of employees an employer has, FICA taxes can have a substantial impact on any employee’s—and business’—bottom line. An employer-sponsored HSA program provides a savvy way for employers and employees to decrease their FICA tax liability and collectively save 15.3% that would otherwise be subject to FICA.

Employer FICA Savings Through an HSA Program Can Be Significant

When an employer works with the right HSA provider to set up an employer-sponsored HSA program and provides their employees with an easy way to make pretax HSA contributions through payroll deductions, the employer lowers both their own and their participating 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. And since FICA taxes are deducted from each paycheck, the savings can add up quickly.

Let’s run through a quick example to illustrate how much an employer could be missing out on simply by not offering an HSA program:

  • An employer has 50 employees who each contribute $2,000 annually to their HSA through pretax payroll deductions. Through those contributions alone, the employer will save $7,650 in FICA taxes annually. Even if the employer pays $2.50 per account per month in HSA program fees, they still save $6,150 annually—just by offering an HSA program and having employees who make pretax HSA contributions. The employer FICA savings greatly outweighs the HSA program cost.

It’s important to note, employer FICA savings through an HSA program are only attainable when the HSA program is set up as part of the employer’s Section 125 cafeteria plan. By structuring the HSA program as part of a cafeteria plan, employees are able to make pretax deferrals, which trigger the FICA savings.

Going halfway and offering an HSA-eligible high-deductible health plan (HDHP) but no HSA program—or not even offering an HSA-eligible HDHP option to begin with—simply isn’t good enough. Employers and employees miss out on critical tax savings and other benefits, and employer recruitment and retention efforts can be negatively impacted.

More HSA Contributions Equal More FICA Savings for Employers

The amount an employer can save in FICA taxes through an HSA program is ultimately tied to the amount of employee engagement in—and pretax contributions to—their employer-sponsored HSA program. Employers stand to save more money the more their employees contribute to their own HSAs through pretax HSA contributions via payroll deduction.

That’s why it’s so critical to choose the right HSA partner with a proven track record of making HSAs easy for everyone and maximizing win-win benefits for employers and employees.

Bend HSA is a platform built for peak performance, and Bend HSA accountholder contributions are 60% higher than the national average.

Let’s revisit the example above, but this time take into account that the employer partnered with Bend for their HSA program:

  • The employer with 50 employees who each previously contributed $2,000 annually to their HSA through pretax payroll deductions now partners with Bend and the employees boost their contributions to $3,200 annually. The employer will now save $12,240 in FICA taxes annually instead of $7,650. That’s an additional $4,590 FICA tax savings annually, just by choosing the right HSA partner.

Employers Can Drive Employee Engagement Through Employer HSA Contributions

Many employers now understand that while offering an HDHP option with an employer-sponsored HSA program is good, providing an employer contribution or match to employee HSAs can make for an even better and more mutually beneficial employee benefits scenario.

When employers contribute to employee HSAs, the HDHP/HSA option itself becomes much more attractive to current and prospective employees, and can often be the trigger that gets even hesitant employees to make the switch to HDHP/HSA coverage.

Employer HSA contributions can also drive an increase in employee HSA contributions. The latest HSA market research shows that 34% of HSAs received an employer contribution in January 2021. And as the number of accounts receiving employer contributions rises, the number of unfunded accounts falls, with fewer than 18% of all HSAs being unfunded. Employer HSA contributions directly correlate with driving employee engagement, boosting employee HSA contributions and ultimately netting more FICA tax savings for both employers and employees.

Download Bend’s Understanding HSA Program FICA Savings for Employers Infographic

Now more than ever, employers need to understand the direct financial benefit they stand to earn through FICA tax savings—savings only achieved by offering an employer-sponsored HSA program. Download Bend’s easy-to-understand infographic and learn how to decode HSA program FICA savings.

By downloading the infographic, you’ll also receive exclusive early access to Bend’s new e-book on maximizing FICA savings for employers.

Get the Infographic

Boost Employee Engagement and Maximize FICA Savings with Bend

Not all HSA providers are created equal, and there’s a lot more to consider than FICA savings potential alone when choosing an HSA partner.

From fees, program implementation, enrollment and administration, to employer and employee resources, support and overall ease of use, it pays dividends—in time, resources, FICA savings, employee engagement 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 and HSA program success.

  • Bend HSA average account balance is 40% higher than the national average
  • Bend HSA accountholder contributions are 60% higher than the national average
  • Bend HSA has 25% more accountholders as investors than the national average

Setting up an HSA program with Bend is simple and quick, and it’s easy to make the transition any time of year—not just open enrollment season—even if you’re currently working with another HSA provider.

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