This week: Few employee benefits deliver a better return than the Flexible Spending Account. FSAs save employees money on healthcare expenses — and save employers even more through reduced payroll taxes. In most cases, this benefit doesn’t just cover its own cost; it actually turns into a profit.
Flexible Spending Accounts: Everyone Wins!
There aren’t many employee benefits that make everyone money, but the Flexible Spending Account (FSA) is one of them.
Employees love FSAs because they help cover predictable medical expenses with pre-tax dollars, stretching every paycheck a little further. Employers should love them too, because an FSA doesn’t just deliver value to the workforce — it often pays for itself entirely through reduced payroll taxes. In many cases, employers actually end up ahead, turning a simple, low-cost benefit into a net financial gain.
How FSAs Work
FSAs let employees set aside pre-tax dollars to pay for eligible healthcare expenses like deductibles, copays, and prescriptions. Because contributions are made before taxes, employees pay less in income and FICA taxes — and employers don’t have to match the FICA on those contributions.
That 7.65% FICA savings may not sound like much, but it adds up fast — and in most cases, it completely offsets the cost of offering the plan.
How the Math Works
(and Why FSAs Really Do Pay for Themselves)
It doesn’t take much participation for an FSA to cover its own cost. For groups with 16 or fewer employees, the annual administrative cost is a flat $1,025 (a $125 setup/renewal fee plus a $75 monthly minimum).
Breakeven for Small Groups
Just a handful of employees can wipe out the entire annual cost:
-
Four employees each contributing the 2026 FSA maximum of $3,400
→ $13,600 total contributions
→ Employer FICA savings: $1,041
→ Plan essentially pays for itself
Or even faster:
-
Two employees each contributing the 2026 DCA maximum of $7,500
→ $15,000 total contributions
→ Employer FICA savings: $1,147.50
→ More than enough to cover the full cost
So even very small groups hit breakeven quickly.
What About Larger Groups? (Example: 20 Employees Participating)
With 20 participants, the annual cost increases slightly:
-
$125 setup
-
$4.50 per month × 20 employees × 12 months = $1,080
-
Total annual cost: $1,205
Now the question becomes:
How much does each employee need to contribute for the plan to pay for itself?
Breakeven contributions=1,2050.0765≈15,765\text{Breakeven contributions} = \frac{1,205}{0.0765} \approx 15,765
Spread across 20 employees:
15,765÷20=788.2515,765 \div 20 = 788.25
Breakeven = about $788 per employee per year
That’s roughly $66 a month—a very small number given the typical FSA election.
But What If Participation Looks Like a Real Group?
If those 20 employees each contribute an average of $2,000:
-
Total contributions = $40,000
-
Employer FICA savings = $3,060
-
Minus the $1,205 admin cost
-
Net employer savings = $1,855
In other words:
Once a group hits normal FSA participation levels, the employer doesn’t just break even—
they actually profit from offering the benefit.
It Gets Even Better!
With some third-party administrators (TPAs), the cost of Premium Only Plan (POP) administration and required discrimination testing is included in the FSA package.
Those two services normally run about $350 per year if purchased separately — so when they’re bundled, that’s essentially $350 in extra savings right off the top.
Pre-Tax Premium Savings Add Up Too
Even before you factor in FSA participation, most employers already let employees pay their share of insurance premiums pre-tax.
Let’s say employees each contribute an average of $250 per month toward their medical premiums:
-
$250 × 12 months = $3,000 per year per employee
-
Employer FICA savings: 7.65% × $3,000 = $229.50 per employee
If you have 20 employees, that’s $4,590 a year in payroll tax savings — all from letting premiums be deducted pre-tax.
Don’t Forget Dependent Care Accounts
If last week’s article on Dependent Care Accounts (DCAs) caught your attention, here’s where the story connects. DCAs let employees pay for child care and similar expenses with pre-tax dollars — and the 2026 limit is jumping from $5,000 to $7,500 per household.
Each DCA participant also reduces FICA taxes for the employer, further offsetting administrative costs. It doesn’t take many participants for the plan to more than pay for itself.
THE BOTTOM LINE
With a POP / FSA / DCA Combo:
✅ Employees save both Federal and FICA taxes on their insurance premiums, medical expenses, and childcare costs.
✅ Employers save on payroll taxes.
✅ The plan’s administrative cost is quickly offset — often many times over.
Between FSAs, POPs, and Dependent Care Accounts, employers can enhance their benefits package, support their team, and reduce payroll costs — all at the same time.
You can’t double-dip by also claiming the child care tax credit for the same expenses, so compare both options.