How FICA Taxes Impact Your Health Accounts
Pre-tax savings. Post-tax savings. And what are these taxes anyway? Understanding Health Savings Accounts (HSAs), Flexible Spending Accounts (FSAs), and other benefits plans can be time-consuming and difficult to explain to employees who might wonder how pre-tax savings works.
Pre-tax savings are tied directly to FICA taxes. Let’s explore how FICA taxes impact both you and your employees.
FICA, or the Federal Insurance Contributions Act, is a federal payroll tax that funds two major government programs: Social Security and Medicare. These taxes are withheld from employees’ wages to provide retirement, disability, and healthcare benefits. Employers shoulder various responsibilities when it comes to FICA taxes:
- Withholding: Employers must accurately withhold the correct amount of FICA taxes from their employees’ paychecks, as prescribed by the IRS.
- Matching contributions: Employers are obligated to match their employees’ Social Security and Medicare contributions, effectively doubling the overall amount contributed to these programs.
How do you provide employees with access to an HSA or FSA once you have one to offer them?
- Implement salary reduction agreements: To get started, establish salary reduction agreements with your employees. These agreements allow your workforce to identify a portion of their earnings to be deducted from their paychecks and contributed to an HSA or FSA.
- Pre-tax contributions: Once these agreements are in place, the allocated contribution amount is deducted from your employees’ paychecks before funds are taxed. This early deduction is critical because it directly reduces their taxable income.
- Realizing FICA tax savings: By channeling funds into HSAs and FSAs with pre-tax dollars, both you and your employees stand to benefit because you’re reducing your and their advantages extend beyond tax savings. Participation in HSAs and FSAs ensures that your employees have funds readily available for qualified medical expenses.
What are some other benefits to HSAs and FSAs?
Offering an HSA or FSA as part of a comprehensive benefits package can help attract and retain top talent. Employees value the ability to save on healthcare expenses and having an FSA as an option can make an employer more competitive in the job market.
HSAs:
- Investment potential: HSAs empower employees to invest their contributions, potentially growing their savings over time. This unique feature positions HSAs as a valuable tool for addressing healthcare expenses during retirement.
- Triple-tax savings: HSAs offer a trifecta of tax advantages, including tax-free contributions, tax-free earnings (if invested), and tax-free withdrawals for qualified medical expenses.
FSAs:
- Upfront funds: Employees can elect a portion of their pre-tax income into an FSA prior to the start of the plan year. FSA funds are immediately available at the start of the plan year for qualified healthcare expenses.
- Tax savings: Contributions made to FSAs are exempt from federal income, Social Security, and Medicare taxes, translating into potential tax savings for employees.
How First American Bank can help
First American Bank Health Account Services offers employers and their employees a variety of consumer-directed health benefit products—including one of the best HSA accounts for 2025, as recognized by Investor’s Business Daily. Partnering with First American Bank lets you offer your employees health benefit accounts with the highest quality terms while freeing you to focus on strategic benefits communications that reminds employees why your company is a great place to work.
Learn more about our health benefit offerings by reaching our Health Account Services team at (847) 586-2239 or emailing [email protected].
