Healthcare-Reform Update: A Smaller FSA
You and your customers may not realize it, but now may be the best time in the foreseeable future for groups to purchase dental benefits for their employees — and the best time for employees not on their group dental plan to opt for group dental coverage.
The reason is a lesser-known facet of the healthcare-reform legislation that cut from $5,000 to $2,500 the amount employees can put into their flexible spending accounts beginning in 2013.
The rationale for the cut was to generate income to fund healthcare reform. The end result is that employees have less tax-free money at their disposal to pay for insurance copays, deductibles, glasses, orthodontia, and prescription drugs.
For employees who used an FSA in lieu of dental insurance to cover dental expenses, and used remaining FSA money to cover other ancillary medical and dental expenses, the halving of the FSA contribution limit means something has to be paid for differently … and that’s where dental insurance comes in.
When a company implements a dental plan and the employees sign up for the plan, the insurance covers the costs that an FSA used to cover, so that reduced FSA money can be spent on other qualified medical expenses and prescription drugs. The value of a dental-benefits plan is now more tangible than ever for employees.
The other aspect of the relationship between a smaller FSA and dental insurance comes with voluntary dental plans. Upcoming open-enrollment periods are a great time to talk about the $2,500 FSA contribution limit and how voluntary dental insurance can cover many of the expenses once paid out of FSA funds by employees who opted out of the dental plan.
One of the complications created by this regulatory change comes with FSAs that follow something other than a calendar-year cycle. A May 2012 clarification of the regulation implements the $2,500 limit on the plan anniversary, so a program renewing in September 2012 can keep whatever limit it has in place until September 2013, when it must change over to the $2,500 limit.
Finally, the IRS has said it is reconsidering the use-it-or-lose-it provision of health FSAs. The thought is that any rollover would be capped ($500 seems to be the round number under consideration), but even a $500 rollover changes the playing field. Under the scenario under consideration, an FSA rollover can function as a multipurpose rollover account, providing an alternative or a complement to dental annual-maximum rollovers.
Not every employer knows about the FSA change, so it’s a great conversation-starter. And when the conversation shifts to dental benefits, the discussion should focus on how dental insurance can fill a gap left by a shrinking FSA.
