Health Savings Accounts: Don’t Leave FICA Savings On The Table

Some clients still don’t see the value in offering a health savings account program to their employees. Help these clients understand the FICA savings being left behind.

By Tom Torre

The Federal Insurance Contributions Act, commonly referred to as FICA, is likely not a new term for most clients. At the highest level, they know it’s a payroll tax applied to both employees and employers. Barring a few exceptions, the FICA deduction comes out of each employee paycheck, and employers share in FICA by paying a matching deduction to the amount each employee is taxed.

But when it comes to clients’ understanding of how setting up a well-structured health savings account program can save them and their employees substantial money in FICA taxes, a knowledge gap sometimes exists, causing clients to dismiss altogether the idea of setting up an employer-sponsored HSA program. They simply don’t see the value in HSA program FICA savings.

Clients frequently are either misinformed about or unaware of the ins and outs of how saving on FICA taxes through an HSA program works — not to mention the many other benefits they and their employees are missing out on without an employer-sponsored HSA program.

A Little Education Goes A Long Way

When it comes to discussing HSA program FICA savings with clients, things can get confusing quickly. It usually helps to start off with a little FICA and HSA program education.

First, clients must understand that the current FICA tax rate for both them and their employees is 7.65% each. Clients are responsible for matching each of their employees’ FICA tax liabilities based off their gross taxable wages. So in essence, the total FICA tax is 15.3% for each employee/employer combination.

Now for a little HSA program education.

An employer-sponsored HSA program provides a savvy way for employers and employees to decrease their FICA tax liability and collectively save 15.3% that would otherwise be subject to FICA tax.

How? By setting up an HSA program as part of the client’s Section 125 cafeteria plan benefit offering.

This is a critical point both brokers and clients must be crystal clear on — clients can benefit from FICA tax savings only through an HSA program set up through a cafeteria plan, which provides employees with an easy way to make pretax HSA contributions through payroll deductions.

The pretax payroll deductions reduce the amount of income that applies to FICA taxes on the employee side, and, in turn, clients directly save the 7.65% on any pretax employee contributions made through their HSA program.

Clients frequently are either misinformed about or unaware of the ins and outs of how saving on FICA taxes through an HSA program works...

Use Examples To Help Clients See The Savings Potential

Once clients receive some basic FICA and HSA program education, providing real-world examples of FICA savings potential can often help them see the true value setting up an HSA program offers.

A client with 50 employees sets up an HSA program in which each employee contributes $2,000 a year to their HSA through pretax payroll deductions. Through those contributions alone, the client will save $7,650 in FICA taxes annually. The FICA savings more than offsets any cost of offering the HSA program. If they pay $2.50 per account per month, or $1,500 annually, they still save $6,150 each year.

When FICA savings are combined with the premium savings a high-deductible health plan typically offers versus traditional health plans, clients of all sizes and scopes can come out well ahead by offering an HDHP paired with an HSA program.

More Employee HSA Contributions, More Client FICA Savings

When it comes to maximizing client FICA savings through an HSA program, the more employees contribute to their HSA pretax, the more the client stands to save. Simply put, client FICA savings potential is tied to how well their employees engage

HSAs Offer a Triple Tax Advantage for Employees

The main hook for employees is an HSA’s “triple tax advantage.” What that means is an employee can save on taxes in three distinct ways with an HSA: 1. Their HSA contributions are 100% tax deductible up to the annual maximum limit. If they contribute pretax, their contributions aren’t included in their gross income and aren’t subject to income and FICA taxes. And if they contribute after tax, they can still deduct their contributions on their tax return to lower their overall tax liability. 2. Their HSA funds can be used tax-free for any qualified medical expenses. 3. Their HSA funds grow tax-free with no restrictions or “use it or lose it” limitations.

SOURCE: Bend

with and use their HSA program.

Educating clients on HSA program FICA savings and getting them to find value in and consider creating their own HSA program is excellent; however, it’s equally important to connect clients with the right HSA partner that can help them build the best HSA program for their business and proactively engage employees from the start to deliver maximum FICA savings.

Looking Beyond FICA Savings

Beyond FICA savings, with a solid understanding of how an HSA program works and benefits both them and their employees, clients can leverage their program as a powerful recruitment and retention tool.

By offering an HDHP option with an accompanying HSA program, clients make it easy for their employees to save money on insurance premiums and taxes while better controlling their health care costs in the short and long term.

HSAs are also one of the only tax-advantaged accounts that both lower an employee’s overall taxable income while simultaneously offering the added financial benefit of lowering their FICA tax liability. Even pretax 401(k) contributions and “before-tax” IRA contributions are still subject to FICA taxes. Helping clients understand that concept alone — so they can help their employees understand it — can lead to win-win benefits, including a happier, less financially stressed workforce.

The Right HSA Partner Can Help Maximize FICA Savings And More

Connecting clients to the right HSA partner is a must, because not all HSA vendors are created equal.

Clients (and brokers) stand to benefit most from working with a provider that specializes in HSAs and has thoughtfully designed their experience — everything from program implementation and enrollment to ongoing administration, resources and tools — to make HSAs easy for everyone while maximizing HSA benefits, including FICA savings.

When clients get quick integrations, administrative automations, a proactive platform that delivers proven results, resolution-focused support and the other features the right HSA partner can provide, they save themselves and their employees time, money and headaches.

As HDHPs and HSAs continue to rise in popularity and use, building relationships with the best HSA providers and creating the right client-vendor connections will become more critical to saving clients money and keeping them on the leading edge of benefit offerings.

Tom Torre is CEO of Bend, a startup specializing in providing health savings accounts for individuals, employers and partners. Tom may be contacted at tom. torre@innfeedback.com.

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Gen Z Needs Help Generation Z is the youngest generation to hit the workforce. And although they are young, they recognize the need for professional financial help. Charles Schwab’s 401(k) Participant Study showed that although Generation Z has been working for only a few years, they already are thinking ahead to retirement.

Almost two-thirds of Gen Z said that their financial situation war-

rants advice from a professional. And compared to older Americans, they are more willing to follow computer-generated advice as well as advice from humans, said Drew Kettering, head of digital solutions, Retirement Plan Services, Charles Schwab.

Gen Z workers want help with managing their financial lives today so they can save more money for their retirement, he said.

Gen Z is also less optimistic than other groups about reaching their retirement goals. In naming their retirement income sources, 36% named their 401(k) plans, 14% their savings and investments, and only 7% named Social Security benefits. More Gen Z participants believe that they are not on top of their 401(k)s and agreed that they do not know what investments to select for their 401(k) plans.

I guess Bob can stay... Most Clients Likely To Keep Their Advisor … But Clients are satisfied with their advisory relationships in general, but their loyalty is being tested. A study conducted by Absolute Engagement and Investments & Wealth Institute revealed the most significant client concerns have less to do with the level of service being provided and more to do with their own level of self-confidence about their financial future. The client experience needs to evolve, the survey pointed out. Advisors need to invest more time in client reviews, with a quarter of clients looking for more contact going forward. More than nine in 10 clients (91%) said they are somewhat or very likely to continue working with their advisor, but about one-third of clients say they have considered making a change. This is a 1% increase over 2020 and an 11% increase over 2019, the survey pointed out.

Americans Blame Their Stress On Finances

Americans are stressed, and money is the reason why. That’s among the findings of a recent report by John Hancock. The report, titled “Retirement Stress, Finances and Well-Being,” showed a whopping three-quarters of Americans admitted they are moderately or extremely stressed, and almost as many blamed the state of their finances for that stress. Nearly half of those surveyed said the pandemic has had a negative or very negative impact on their mental health.

And a lack of financial guidance is inhibiting their ability to prepare for retirement, with more than one-third (34%) of millennials and Generation Z saying they

need advice to help them get ready for

their post-employment years.

Of the social media platforms out there, YouTube seems to be the most popular place for Gen Z (63%) and millennials (71%) to discuss financial planning, while TikTok is gaining popularity with Gen Z (56%), according to the survey. More than 60% of the respondents who receive their information online said that they have acted on that advice.

Most Americans See A Recession Coming

A majority of Americans remain worried about market volatility, with more than three-quarters saying they expect the market to be very volatile in 2022. That was the word from Allianz Life, whose survey showed 67% of Americans fear that new COVID-19 variants will lead to another recession.

And as inflation hits 40-year highs, 74% say they

are concerned about their purchasing power

over the next six months. Another 64% say their income is not keeping up with expenses, and the same percentage worry their income will not keep pace with tax increases.

A further 57% of those who plan to retire in the next few years say market volatility will impact their plans, and 61% say they are worried their current financial strategy won’t cover their desired lifestyle.

DID YOU KNOW?

68% of respondents said inflation is their top concern for 2022.

SOURCE: Associated Press/NORC Public Affairs Research Center

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