To offer an FSA, or not to offer an FSA, that is the question. Let’s just cut right to the chase.
Flexible Spending Accounts (FSAs) are a great way for employees to save on taxes for medical and dependent care expenses, but employers also receive financial benefits by offering an FSA.
While there’s an approximate cost to employers of $5/employee/month (or $60/employee/year) to outsource the administration of an FSA, there’s also a tax savings employers receive. Employers avoid a 7.65% payroll tax (i.e. Medicare and Social Security tax) on the amounts employees contribute to an FSA.
The average employee contribution to a Health FSA is around $1,350/year, and the average contribution to a Dependent Care FSA is around $3,200/year. We can calculate the annual tax savings as follows:
- Health FSA Tax Savings: $1,350 x .0765 = $103 (rounded to nearest dollar)
- Dependent Care FSA Tax Savings: = $3,200 x .0765 = $245 (rounded to nearest dollar)
This means the employer “profits” $43/year on the average Health FSA participant and $185/year on the average Dependent Care FSA participant.
It’s hard to make an argument against offering an FSA. How many benefits are there that actually make an employer money? We know at least one that does!