Dec. 12, 2013, 8:47 a.m. EST
An annual cap on flexible spending accounts is increasing medical costs
Here’s something your orthodontist is not smiling about: a new tax rule raised the cost of braces this year.
Thanks to a change from the Affordable Care Act that places an annual $2,500 contribution cap on flexible spending accounts, which let workers set aside pre-tax dollars to cover medical expenses, some consumers may be spending more on braces, expensive eyewear and other medical supplies they would typically buy with the accounts. Before the new rule, there was no official cap on how much taxpayers could stash into the account, though many companies typically set their own limits of $5,000. For a person in the 25% tax bracket, the cap cuts the maximum tax break in half to $625 from $1,250.
For families who relied on the accounts to help them cover the costs of pricey medical services like braces, the cap indirectly raises their costs, says Gayle Glenn, president of the American Association of Orthodontists, which along with some other medical groups is calling for the cap to be eliminated. About 65% of the roughly 17,000 orthodontists surveyed by the association in 2009 said their patients used FSAs to pay for treatment. And with the cost of braces ranging from $5,000 to $7,000, many families likely max out their FSA contributions to pay for them, says Glenn, whose association recently circulated a letter for orthodontists to publish in their local newspapers, encouraging people to write to Congress to challenge the cap. “We want people to be aware,” says Glenn.
To be sure, not all health-care pros are fighting the annual contribution cap to FSAs, which they say has led to positive changes for taxpayers. Without the cap, Treasury officials wouldn’t have been likely to do away with the 30-year-old “use it or lose it” rule requiring taxpayers to spend their entire balance by the end of the year or forfeit the funds, says Bob Natt, executive chairman of Alegeus Technologies, a company that provides payment and open enrollment technology for employers. In October, the Treasury Department announced a change to let people carry over $500 of their balances into the following tax year, which could make many taxpayers more comfortable with using the accounts, says Natt. “We anticipate there will be a large increase in people who choose to participate in FSAs because they no longer have a fear that they’ll lose their money at the end of the year,” he says.
Dental expenses are the third most popular use for FSAs, according to an analysis by Alegeus, which found 38% of FSA dollars are spent on medical expenses, 28% at the pharmacy and 23% on dental expenses. Glenn says her group will send representatives to Capitol Hill to make the case for repealing the $2,500 cap, as well as to address other issues. Lawmakers have introduced a number of bills that would loosen the restrictions on how FSAs can be spent and repeal the cap, but it isn’t clear how likely such bills are to pass.