Orthodontia expenses are eligible for reimbursement through a Flexible Spending Account (provided they are allowed by your plan) although it’s tricky sometimes to figure out the best way to do it. Orthodontia is the only Code 213(d) expense that can be spread out over more than one Health FSA plan year because it may take longer for the treatment to be completed.
The tricky part comes with how individuals are often charged for the procedure. Frequently, an initial, up-front payment is required and then periodic payments are made over the rest of the treatment period. Other times, the participant prepays the entire amount due in advance of receiving treatment. So, you can see that with orthodontia, it is difficult to match payments with the date of service – as is typically required with a Health FSA – especially when prepayment and monthly contractual payments don’t line up with when the braces are installed and periodically tightened.
To address this trickiness, the IRS issued proposed regulations in 2007 (yes, they still have not been finalized) that allow that Health FSAs may, but are not required to, reimburse advance payment for orthodontia services as long as the employee is an FSA participant at the time of service and has actually made the payments in advance to receive the services. Under the regulations, the orthodontia services are deemed incurred when the participant makes advanced payment.
The same regulations also allow Health FSA plans to require that reimbursement of orthodontia expenses can be matched with actual treatment. Why would an employer opt for this requirement? You’ll recall that an FSA participant can be reimbursed for up to their annual election at any time during the plan year without the contributions having been made to the plan yet. You will also recall that should this participant, who has used all their reimbursement, terminate employment before the contributions can be recouped, the employer is out of luck and on the hook for those dollars. Therefore, to avoid reimbursing the employee their entire plan year election as a prepayment early in the plan year and then be stuck with no option to deduct from the final paycheck when the employee terminates employment, an employer can elect not to allow pre-payment reimbursements for orthodontia procedures. Reimbursing only a monthly amount keeps the contributions and payments the same thereby lowering the employer’s risk.
Examples:
1) Full payment at the first visit
A participant elects to contribute the maximum limit in their Health FSA ($2,700 for a family in 2019). In February, a contract is signed for a daughter’s braces, with an estimated 18 months of treatment. The contractual amount is $2,350 and participant decides to pay in full. By signing a contract and paying for the services up front, assuming their plan allows pre-payment, a participant can be reimbursed for the full $2,350 in 2019 provided they have that amount remaining in their election. In this case, the “date of service” is deemed to be the day the date of payment. Should the participant terminate employment in, say, May, and only have contributed $1,000 to their FSA account, the employer is on the hook for the remaining $1,350.
2) Ongoing payments
A participant elects to contribute the maximum to their Health FSA in 2019 (again, $2,700 for a family). In February, a contract is signed for a daughter’s braces, an estimated 18 months of treatment, with services beginning in March. The contractual amount is $2,350 and participant decides on a payment plan that includes a $550 dollar down payment and $100 monthly installments. The participant could be reimbursed for $1,550 in 2019 (the $550 down payment plus $100/month from March – December). The participant would then elect to contribute at least $800 to their Health FSA in 2020 and that would be the reimbursement level for the remaining 8 months of service ($100 x 8 months = $800). Again, the “date of service” is deemed to be the date of payment – only, in this case, the payments are ongoing and eligible for reimbursement as they are paid.
The Secret to FSA/Orthodontia reimbursement success
Here’s our suggestion to Health FSA participants who have the benefit of planning in advance for an upcoming orthodontia expense and are considering a payment plan (most common):
- A participant elects the maximum limit for the plan year.
- The participant plans to visit the orthodontist the last three months of the plan year, then uses the FSA plan for family out-of-pocket medical, dental and vision expenses throughout the year. Toward the end of the year, when they are asked to provide an initial down payment, they know how much is left in their Health FSA. They make the down payment and, preferably, allow for one to two months of monthly payments before the plan year ends.
- The participant enrolls in the Health FSA the following plan year and calculates their election by multiplying the monthly orthodontia payments by 12 months (or to the amount of time remaining in the estimated treatment period). This is what they should elect to contribute for the subsequent plan year. If this amount does not put them over the maximum plan limit, they can elect to add a few dollars to cover their family’s expected medical, dental and vision expenses.
One caveat to this formula for success is if the participant has a Health FSA plan with a $500 carryover feature. Having that extra carryover amount from the prior year helps with planning and spending in the new year. The participant, having elected the maximum in the plan year in which services begin, can also be reimbursed for the extra $500 from last year (provided this amount remains in the account). This extra $500 can go a long way towards paying more for orthodontia expenses in the first year thereby reducing future monthly payment amounts and the total length of the contract.
Conversely, here’s what a participant should NOT do if they can avoid it:
- Don’t not pay the entire orthodontia contractual amount in the same plan year and plan to submit itemized statements from the orthodontist each month trying to establish monthly dates of service. This is a paperwork nightmare and the finance staff at the orthodontist will hate them for asking for this documentation monthly.
- Don’t not pay the entire orthodontia contractual amount in the same plan year and seek to be reimbursed only in the same plan year. The statutory limits on the Health FSA may be way less than you paid therefore you are missing out on tax savings (isn’t that what it’s all about anyway?).
We hope your employees will experience tax savings on every single dollar they spend on orthodontia treatment. Follow our formula for success and they will most certainly do just that!