FSA Break-Even Breakdown

This formula proves how a Flexible Spending Account can save you money. 

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A Flexible Spending Account (FSA) is one of the few benefits an employer can provide that will often pay for itself.

Yes, there are still some expenses that employers will incur when using a third-party administrator for the FSA—but there are payroll tax savings that will offset some if not all those expenses.

The Federal Insurance Contributions Act (FICA) is a payroll tax imposed on employees and employers to fund Social Security and Medicare. FICA taxes amount to 15.3% of the employees’ wages, but the tax is split equally between the employee and employer.  The employee is assessed a 7.65% tax, and the employer is also assessed a 7.65% tax.

A key feature of FSAs is that your contributions are not subject to taxes, including the FICA payroll tax. Not only does the employee save taxes on their contributions, but the employer also reduces their FICA tax liability by offering an FSA.  In many instances, employer tax savings are equal to or greater than the administrative expenses associated with an FSA.

There’s a simple formula to determine when contributions will provide enough tax savings to offset the FSA administrative expenses:

Annual FSA Administrative Expenses ÷ 7.65%

Let’s assume the annual cost for an employer to administer an FSA is $1,000. We’re going to take that expense and divide it by the employer’s FICA tax percentage (which should be entered as .0765).

$1,000 ÷ .0765 = $13,072 (rounded to nearest dollar)

When total employee contributions are at $13,072, the employer will save $1,000 in FICA taxes, which is the exact amount of the administrative expenses for the FSA in this example. This formula tells the employer their break-even point.  And, if contributions exceed $13,072, the employer’s FICA tax savings will be greater than their administrative expenses. 

An FSA is truly a benefit that can pay for itself. Plus, there are two different kinds of FSAs an employer can offer.  Health FSAs and Dependent Care FSAs.

  1. Health FSAs allow employees to pay for out-of-pocket medical expenses with tax-free dollars.
  2. Dependent Care FSAs allow employees to pay for things like daycare with tax-free dollars.

By offering both FSAs, an employer can easily meet or exceed their break-even point—making it a win-win for everyone.