The undervalued benefit of HSA programs employers and employees may be missing: FICA savings
Health savings accounts (or HSAs) are having a moment. Consider the numbers. The total amount held in health savings accounts grew to $98.8 billion in assets in almost 34 million accounts by mid-2022, with account holders contributing over $26 billion to their accounts in the first half of 2022.1
Despite this continued growth and steady increase in consumer use, some employers may still question the value in offering an employer-sponsored HSA to their employees. An HSA is an individually owned account that employees can contribute to on a pre-tax basis and use to pay for eligible medical, dental and vision expenses, while reducing their taxable income. They are available to anyone enrolled in a high deductible health care plan. Yet in 2021, more than 70% of companies that offered health benefits did not offer a plan that qualified enrollees for an HSA.2
As employers continue to look for ways to attract and retain top talent, many are increasingly enhancing their benefit offerings: 70% of all large employers are planning benefit enhancements for 2023.3 HSAs are one way to expand your current benefit offerings, particularly in the form of savings opportunities to both the employee and the employer.
To make the most of these accounts, it’s essential employers understand the direct financial benefit they stand to earn through FICA tax savings and other monetary benefits. Please note that this is informational only and not intended as legal or tax advice — consult a tax or legal professional regarding your specific circumstances.
HSAs provide potential for employer and employee tax savings
When employees contribute to an HSA with pre-tax dollars, employers pay less Federal Insurance Contributions Act (FICA) and Federal Unemployment Tax Act (FUTA) payroll taxes. FICA is a U.S. federal payroll tax paid by both employers and employees. This money helps fund Social Security and Medicare, and provides benefits for retirees, the disabled and children. The federal payroll tax rate in 2023 is approximately 15.3%, and employers cover 7.65%, and employees cover 7.65%.4 Of that percentage, 6.2% goes toward Social Security and 1.45% goes toward Medicare.5
Employers that offer HSAs to their eligible employees provide a way for the company and employees to realize multiple tax savings. For employees, their pretax HSA contributions are made directly through payroll deductions and not only lower their overall taxable income (i.e., they may pay less in overall income tax for the year because of it), but those contributions are also not subject to FICA taxes.
HSAs are considered a unique savings vehicle since it’s one of the only tax-advantaged accounts that offers financial benefits to both employees and employers. Companies that offer HSAs don’t have to pay FICA taxes on any pre-tax contributions from the employer or the employee.
Here’s an example of how much HSA accounts can save
Employers don’t pay federal payroll taxes (FICA) on employees’ pre-tax payroll deductions to fund their HSAs. That’s a 7.65% savings. When an employee deposits $2,000 into their account, their employer saves $153 (or less if the employee earns more than $160,200 in 2023).6 Even if the company absorbs the usually nominal monthly account administration fee, the net savings may still exceed $100.
More employee contributions equal more savings
Employer FICA savings potential is directly tied to employee engagement and contributions into their employer-sponsored HSA programs. In other words: More employee HSA contributions equal more potential for savings for employers.
Because of that, employers should also understand the importance of picking the optimal HSA provider. Doing so helps build the most advantageous HSA program for their — and their employees’ — needs. This in turn encourages employee engagement and drives the most FICA savings potential for both the employees and the employer.
HSA contribution limits for 2023 are $3,850 for self-only and $7,750 for family coverage.7 If employees maximize their savings opportunity and contribute $3,850, employers would save $295 per employee (minus the monthly account fee).
HSA: Beyond monetary benefits
Tax savings are great, but beyond that, employers who set up a well-planned HSA program also provide employees with an account that can be a catalyst to help them better control their short and long-term health care costs and invest in their future. For example, 65% of people with an HSA price shop for health care products and services, compared to 58% of those without one.2
This makes the HSA a powerful recruitment and retention tool, particularly when employers also offer to make contributions to employee HSAs themselves. In fact, 40% of employers say they believe workers leave their job to find employment that offers better benefits, while only a little more than half (54%) of American workers report being content with the benefits their current employer offers.8 Besides offering HSAs, the ability to streamline benefit offerings through easy integrations, administrative automations and other features often offered by a tech-forward HSA provider can save both employers and employees time and headaches.
6 things to consider when choosing an HSA provider
Not all HSA providers are created equal. A few key things employers may wish to consider when shopping around for the most optimal HSA partner include:
- Program implementation
- Employer and employee resources
- Support and overall ease of use
Keep these in mind when doing your research and be sure to ask pointed questions regarding all of them. Finding a provider that best meets your needs on each of these can pay dividends, both in FICA savings and beyond. In fact, partnering with a provider that specializes in HSAs and has a proven track record of increasing employee engagement can make it easier for everyone to maximize their HSA benefits and make maximum FICA savings a reality.
To learn more about Voya’s HSAs, contact your Voya representative. Already offer an HSA? Share this goal calculator with your employees to help encourage HSA utilization.
Read related articles:
- “2022 Midyear Devenir HSA Research Report” Devenir Group, LLC., September 20, 2022.
- Neeleman, Steve. “7 insights from 20 years of HSAs” BenefitsPRO, January 31, 2023.
- “Health & benefit strategies for 2023” Survey Report. Mercer, 2022.
- Miranda, Dana and Bottorff, Cassie. “Payroll Tax Rates (2023 Guide)” Forbes ADVISOR, Updated January 18, 2023.
- “Introductory Material: Social security and Medicare tax for 2023” Internal Revenue Service, irs.gov, Publication 80 (2023), (Circular SS) – For use in 2023.
- “Social Security: Contribution And Benefit Base” Social Security Administration, ssa.gov, 2023.
- 2023 Health Savings Accounts – Tax forms and instructions (26 CFR 601.602, Rev. Proc. 2022-24), Internal Revenue Service, irs.gov, September 2022.
- Miranda, Dana. “These Are The Best Employee Benefits In 2023” Forbes ADVISOR, Updated February 6, 2023.
These materials are not intended to be used to avoid tax penalties, and were prepared to support the promotion or marketing of the matter addressed in this document. The taxpayer should seek advice from an independent tax advisor.
This information is provided by Voya for your education only. Neither Voya nor its representatives offer tax or legal advice. Please consult your tax or legal advisor before making a tax-related investment/insurance decision.
Health Account Solutions, including Health Savings Accounts, Flexible Spending Accounts, Commuter Benefits, Health Reimbursement Arrangements, and COBRA Administration offered by Voya Benefits Company, LLC (in New York, doing business as Voya BC, LLC). HSA custodial services provided by an approved HSA custodian as indicated in the applicable custodial agreement. For all other products, administration services provided in part by WEX Health, Inc.
This highlights some of the benefits of these accounts. If there is a discrepancy between this material and the plan documents, the plan documents will govern. Subject to any applicable agreements, Voya and WEX Health, Inc. reserve the right to amend or modify the services at any time.
The amount saved in taxes will vary depending on the amount set aside in the account, annual earnings, whether or not Social Security taxes are paid, the number of exemptions and deductions claimed, tax bracket and state and local tax regulations. Check with a tax advisor for information on whether your participation will affect tax savings. None of the information provided should be considered tax or legal advice.