Courtesy of HR Made Simple
If you're wondering how employees can save money by spending, think of it as money that would be spent anyway - on healthcare and dependent care costs. A Flexible Spending Account (FSA) is a great employee benefit that not only saves your employees' money; it gives you a break, too.
Rising Healthcare Costs
According to Hewitt Associates [PDF], many employers are offering healthcare FSA's as an employee benefit to ease the costs of group medical plans.
Healthcare costs continue to escalate, driving up the cost of deductibles and co-payments. Since the deductible and co-payment amounts paid by the employee can be reimbursed through an FSA, the impact is minimized. The net result is that the employee is paying for a portion of his or her medical cost on a pretax basis - saving about 30% of what they would have spent anyway.
Dependent Care Realities
Not surprisingly, the survey also found that dependent care FSA's met the demand for daycare cost savings. As the number of dual wage earner and single-parent families continues to increase, the demand for daycare also rises. And with reasonably high daycare costs, employees are looking for relief.
A dependent care FSA provides the opportunity for employees to pay for part or all of their dependent care expenses on a pretax basis.
How Much Could an Employee Save?
If an employee is incurring $5,000 of dependent care expenses plus $1,000 of healthcare expenses a year, this employee could save up to $2,319 in taxes annually. This assumes a federal tax rate of 28% ($1,680), a state tax rate of 3% ($180), and the combined FICA/Medicare tax rate of 7.65% ($459).
Read this related article and calculate what employees can save on dependent care costs.
Why Everyone Wins with FSA's
Not only do employees save cold hard cash with FSA's, employers benefit, too. Here's how:
- Despite initial start-up costs to cover legal documentation and communication expenses, most ongoing administration expenses can be offset if the plan is designed to have expenses paid by employee forfeitures - commonly known as "use it or lose it." This puts the burden on the employee to make sure they aren't setting aside too much money and that they are using their FSA correctly.
- Per IRS rules, employees do not pay FICA taxes on any amounts deferred in an FSA. Since the employer matches the FICA tax paid by the employee, the employer saves the expenses of those FICA taxes.
- If the employee were to defer the same $6,000 of income (noted in the sample above) toward a 401(k) plan instead, the employee could defer only the payment of $1,860 in taxes, since FICA taxes must be paid on amounts deferred in a 401(k) plan. In this case, the total savings is greater with the FSA plan.
Read the full article to learn more abut how FSA's work - sign up for HR Made Simple today!