The mechanic, in one paragraph
FICA tax is 7.65% on both sides of the payroll line - employer and employee. The taxable wage base is the employee's gross pay minus any qualified pre-tax deductions. Section 125 of the Internal Revenue Code defines what counts as a qualified pre-tax deduction: health insurance premiums, HSA contributions, and a small list of other items including SIMERP contributions. Each dollar that's pre-tax under Section 125 is a dollar that doesn't generate FICA tax on either side.
Why the obvious paths are usually fully exploited
If you already run employee health insurance contributions through a Section 125 plan - and most small businesses do - you've captured the easy FICA savings. HSA and FSA contributions add some additional savings. After that, the standard menu is exhausted.
The under-used path: SIMERP
A Self-Insured Medical Expense Reimbursement Plan (SIMERP) is the next category of qualifying pre-tax election. It's not new - the underlying statutes (Section 125, Section 105(b), Section 213(d)) have existed for decades. But until preventative care telehealth networks made the benefit side useful at scale, SIMERPs were mostly the province of large self-funded employers.
The numbers on a 100-employee business
A 100-employee business with average $4,500/month wages, 70% participation, and a $700/month qualifying pre-tax contribution per enrolled employee will see approximately $4,000 in monthly employer FICA savings - about $48,000 a year. Net of a $40/employee admin fee, that's still ~$15,000 a year going back into payroll, retention, or operating cash. Larger businesses scale linearly.
What to look at before saying yes
- Is the program structured as a SIMERP or as an indemnity plan? (The IRS Chief Counsel took an unfavorable position on indemnity in 2023 - that matters.)
- Does the program produce real claim activity on the underlying telehealth network, or is it primarily a tax-savings shell?
- What does the plan document say about reimbursement of qualified medical expenses under Section 213(d)?
- What's the per-employee admin fee, and is it billed in arrears (good sign) or pre-paid (less good)?
The honest version
This is not a tax credit. This is not a loophole. It is using statutory pre-tax elections the way Congress wrote them. The reason most employers haven't done it isn't compliance - it's that the benefit side wasn't useful enough to justify the friction. That has changed.