Adding up the potential tax savings of popular consumer-directed benefits.
In this environment, benefits leaders are under pressure to get creative and help employees spend smarter and save more.
The most common consumer-directed benefits already deliver amazing tax savings, potentially thousands of dollars in savings each year. These should be among the first strategies deployed in constructing an efficient benefits program.
Below we explore how much employees could save if they maximize their benefits. To keep it simple, we’ll use 20% as the example tax rate to derive potential savings.
HSA | Health Savings Account
$1,550 potential tax savings
HSAs let employees set aside money to pay for future healthcare costs. Not only can members spend their HSA tax-free on qualified medical expenses, but they can also invest their money and any potential tax growth is also tax free.* The 2023 family plan HSA contribution limit is a whopping $7,750, up $450 from the prior year.
Not paying 20% taxes on $7,750 means employees could see $1,550 more dollars in their pocket at the end of the year.
LPFSA | Limited Purpose Flexible Spending Account
$610 potential tax savings
LPFSAs let employees complement their HSA with an account specifically designed to help pay for dental and vision expenses.** For 2023, the LPFSA contribution limit is $3,050.
Not paying 20% in taxes on $3,050 means employees could see $610 more dollars in their pocket at the end of the year.^
DCFSA | Dependent Care Flexible Spending Account
$1,000 potential tax savings
DCFSAs are a great way to support employees with the rising costs of childcare. According to a 2022 study, the cost of childcare has risen 41% since the start of the pandemic. According to the same study, childcare costs in some lower-income households cost twice as much as their mortgage.
For 2023, the DCFSA contribution limit is $5,000. Not paying 20% in taxes on $5,000 means employees could see $1,000 more dollars in their pocket at the end of the year.
Commuter Benefits
$1,440 potential tax savings
Commuter benefits let employees save on taxes for both parking and transit expenses.
For 2023, the IRS will let employees use their commuter benefits to spend $300 a month tax free for eligible parking expenses and $300 a month tax free for eligible transit expenses. That’s $600 a month—and $7,200 for the year.
Not paying 20% in taxes on $7,200 means employees could see $1,440 more dollars in their pocket at the end of the year.
$23,000 total potential contributions
Taken altogether, employees with a family health plan could contribute up to $23,000 to their HSA, LPFSA, DCFSA, and commuter benefits. That’s more than the 2023 IRS contribution limit for 401(k)s. And that means potentially even more tax savings than employees get who max out their pre-tax retirement.
That’s $1,500 + $610 + $1,000 + $1,440 = $4,550 potential tax savings
Even if employees only contribute a quarter of this, they could still see $1,000+ tax savings each year.
But getting employees to take full advantage of their benefits is not easy. It requires sustained, targeted employee education to boost benefits understanding.
As you consider potential benefits partners, prioritize employee education and engagement. It can make a significant difference when it comes to maximizing benefits utilization—and employee satisfaction.