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Informed Investor: Limited Expense HCFSA Available to Employees with Excess Dental and Vision Expenses

In the third of four columns discussing choices related to the 2017 benefits “open season”, this week’s column discusses the limited expense health care flexible spending account or LEX HCFSA, including what type of expenses a LEX HCFSA pays for, which employees should consider enrolling in a LEX HCFSA, and how employees enroll in a LEX HCFSA.

A recent “Informed Investor” column discussed the health care flexible spending account or HCFSA which is available to all employees in order to pay out-of-pocket medical, dental and vision expenses. Another column discussed the health savings account or HSA which is available to those employees who are enrolled in high deductible health insurance plans. Contributions to an HSA are tax deductible and withdrawals from the HSA used to pay qualified out-of-pocket medical, dental and vision expenses are tax-free.

An employee cannot be enrolled in an HCFSA and also contribute to a HSA. There is another type of FSA available called a limited expense HCFSA or LEX HCFSA for those employees who have significantly more dental and/or vision expenses compared to medical expenses and who want to preserve their HSA funds. This column discusses the LEX HCFSA which is available to all employees as part of the federal FSA program, FSAFEDS.

The LEX HCFSA helps an employee save when they pay for  eligible dental and vision care expenses, as shown on https://fsafeds.com/explore/lex-hcfsa/expenses. Employees can enroll or reenroll in the LEX HCFSA only during an “open season” which, for the 2018 plan year (Jan. 1, 2018 through Dec. 31, 2018), runs from Nov. 13, 2017 through close of business on Dec. 11, 2017. During the current “open season” employees must decide whether to participate in the 2018 plan year and how much to set aside of their gross salary during 2018 to put into their LEX HCFSA.

There is no requirement that an employee be enrolled in a Federal Employees Health Benefits (FEHB) plan, or a dental insurance or vision insurance plan offered through the Federal Employees Dental and Vision Insurance Plan (FEDVIP) in order to participate in a LEX HCFSA. Employees can set aside as little as $100 and as much as $2,650 into their LEX HCFSA during 2018. The amount that an employee chooses to set aside will be deducted evenly over 26 dates during 2018.  The deductions are made from an employee’s gross salary before all taxes – federal and state income taxes, Social Security (FICA) and Medicare Part A (hospital insurance) payroll taxes - are deducted from the gross salary. The following example illustrates:

Jean elects to participate in the LEX HCFSA for 2018. During the “open season”, she elects to set aside $2,600 of her 2018 salary to the LEX HCFSA. Starting with the first pay date in January 2018 and continuing for the remaining 25 pay dates, Jean will have $2,600/26 or $100 deducted from her gross salary. Her taxable Social Security and Medicare wages will also be reduced by $2,600.

Which employees should consider enrolling in the LEX HCFSA? Those employees who:

• Want to maximize their tax savings while being enrolled in both an HSA and a LEX HCFSA;

• Want to save an average 30 percent on eligible out-of-pocket dental and vision expenses that they incur now while they are using their HSA to save for future health care expenses including expenses during retirement;

• Intend to access the full amount of their LEX HCFSA starting in January. The following example illustrates;

 Jan has a son who will get braces starting in January 2018. The cost of the treatment is $2,500 during 2018. Jan must make quarterly payments of $625 to the orthodontist that are due Feb 1, May 1, Aug. 1 and Nov. 1. Jan will set aside $2,600 of her gross salary. She will request $625 at the end of January, July and Oct from her LEX HCFSA to pay for her son’s orthodontics.

• Can carry over up to $500 from one plan year to the next. The employee must reenroll in the LEX HCFSA for the new plan year during the “open season” even if additional LEX HCFSA funds will not be deducted from the employee’s gross pay during the new plan year.

Some of the more popular dental and vision expenses that are eligible to be reimbursed from a LEX HCFSA include: vision exams, LASIK surgery, contact lenses, eyeglasses, dental cleanings, x-rays, fillings crowns and orthodontics.

Employees are encouraged to look back at the year 2017 and determine what they have spent in out-of-pocket dental and vision expenses for themselves and family members (spouses and tax dependents) and project ahead to 2018 in order to determine how much of these expenses they will incur in 2018.

They should also look at the various dental and vision insurance plans offered through FEDVIP, found at https://www.opm.gov/healthcare-insurance/flyers/dental-insurance-overview.pdf and https://www.opm.gov/healthcare-insurance/flyers/vision-insurance-overview.pdf. The purpose is to figure out whether they are better off financially speaking enrolling in separate dental and/or vision insurance or “self-insuring” through the LEX HCFSA.

FSAFEDS provides a LEX HCFSA calculator to see how much they can save by enrolling in a LEX HCFSA. The calculator may be found at https://www.fsafeds.com/support/savingscalculators/lex-hcfsa.

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