Are FSA Contributions Exempt From FICA Taxes?
Understand the tax advantages of Flexible Spending Accounts. This article clarifies the FICA tax exemption for FSA contributions.
Flexible Spending Accounts (FSAs) and Federal Insurance Contributions Act (FICA) taxes are key to an employee’s financial planning. Understanding their interaction, especially regarding tax exemptions, can reveal potential savings. This article explores FICA taxes and FSAs, clarifying whether FSA contributions are exempt from FICA.
FICA Tax Fundamentals
The Federal Insurance Contributions Act (FICA) tax is a mandatory U.S. federal payroll tax funding Social Security and Medicare programs. Both employees and employers contribute to FICA, with employee portions typically withheld from gross wages. Social Security tax provides benefits for retirees, disabled individuals, and survivors. Medicare tax finances healthcare coverage for those aged 65 and older, and certain younger individuals with disabilities.
For employees, the Social Security tax rate is 6.2% on wages up to $176,100 for 2025. The Medicare tax rate is 1.45% on all eligible compensation without a wage limit. Employers pay a matching 6.2% for Social Security and 1.45% for Medicare. These contributions support vital financial and health benefit programs.
Flexible Spending Accounts Explained
A Flexible Spending Account (FSA) is an employer-sponsored benefit allowing employees to set aside pre-tax money for qualified medical or dependent care expenses. Contributions are made through payroll deductions, reducing an employee’s taxable income for federal income tax. This provides a tax advantage, enabling individuals to pay for eligible out-of-pocket costs with untaxed funds.
FSAs are subject to Internal Revenue Service (IRS) regulations, including annual contribution limits. The healthcare FSA contribution limit is $3,200 for 2024. FSAs have a “use-it-or-lose-it” rule, requiring funds to be spent by the plan year’s end. However, employers may offer a grace period of up to 2.5 months or allow up to $660 for 2024 to be carried over to the next year.
FSA Contributions and FICA Exemption
Contributions to a Flexible Spending Account are exempt from FICA taxes, including both Social Security and Medicare taxes. This means the portion of an employee’s wages contributed to an FSA is not subject to the combined 7.65% employee share of FICA taxes. This exemption allows employees to realize tax savings beyond federal income tax.
The FICA exemption reduces an employee’s overall tax liability. For every dollar contributed to an FSA, employees save the percentage they would have paid in FICA taxes, in addition to federal income tax savings. This leads to greater take-home pay for FSA participants, as less gross income is subject to these mandatory payroll taxes. Employers also benefit, as they do not pay their matching FICA share on employee FSA contributions.