The cost of dental care and braces sometimes can be a strain on your budget — especially if you have a large family.
In effect, defined contribution plans can act very much like a gift card. In other words, rather than just enabling you to visit the dentist, these plans can make premium dental services — such as braces, dental implant and a dental crown — much more affordable.
How Defined Contribution Plans Differ From Traditional Health Insurance Plans
Defined contribution plans are relatively new. They are different from traditional health insurance plans offered by employers or purchased separately to help cover the costs of dental care and other health and medical needs.
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Traditional health or medical insurance plans are defined benefits plans. In other words, the benefits of the plan are outlined, and you or your employer then pays fully or in part for this pre determined combination of benefits.
If you are an employee, you pay a portion of the premium for this type of coverage with money that is withheld from your paycheck each pay period.
In defined contribution plans (also called consumer-directed or self-directed health plans) you are given a “menu” of health care benefits to choose from that can be customized for your needs. Dental benefits, including at least partial payments for dental exams and teeth cleaning, often are listed among your choices in a defined contribution plan.
A portion of the fees for the health care coverage you receive under a defined contribution plan comes from money that is deducted from your paycheck before your federal, state and social security taxes are calculated.
Because you are paying for your health care coverage with pre-tax dollars, defined contribution plans reduce your taxable income and the amount of taxes you pay at the end of the year, saving you money.
Types of Defined Contribution Plans for Dental Care
Types of defined contribution health and medical plans you can use to lower your dental and cleaning costs include:
- Cafeteria plans
- Flexible spending accounts (FSAs)
- Health reimbursement arrangements (HRAs)
- Health savings accounts (HSAs)
Employer-sponsored plans may be managed by your employer or by a third-party administrator (TPA), such as a health insurance company.
Dental Benefits in Cafeteria Plans
In cafeteria plans, your employer takes a portion of your salary and deposits it into a non-taxable account to be used for health care spending. You can choose from a “menu” of health coverage options that can include dental benefits.
The amount of money that is deducted from your paycheck annually is determined by the number and costs of benefits you choose from the menu of benefits offered. Because these funds are not released to you but are instead directly applied to your employee benefit plan, they are treated as tax-free income.
The menu of benefits associated with a cafeteria plan can include the following:
- Health insurance
- Dental insurance
- Vision benefits
- Long- and short-term disability benefits
- Deposits to FSAs and HSAs
The advantage of cafeteria plans is that you can choose only those benefits that are valuable to you and that you are likely to need. For example, if you are over a certain age or you are sure you are not going to have children, you can choose to exclude coverage related to prenatal care and childbirth.
Dental Benefits in Flexible Spending Accounts (FSAs)
A flexible spending account, also called a “flex plan,” is another type of employer-sponsored defined contribution health plan. With an FSA, your employer:
- Sponsors a menu of employee benefits, similar to those listed under the cafeteria plan, from which you can choose.
- Deposits a certain amount of your pre-tax salary into an account set up to reimburse certain allowed medical expenses.
The amount of money deposited in an FSA account is determined by an agreement between you and your employer, up to a maximum contribution of $2,650 in pre-tax dollars in 2018.
If you don’t use all your FSA funds within the plan year, you have one of two options depending on your plan’s provisions:
- If your plan has a carryover feature, you can roll over up to $500 of unused FSA dollars to the next year. (But you will forfeit any funds in excess of $500 still in your account at year-end.)
- If your plan has a grace period provision (rather than a carryover feature) you may have an additional two-and-a-half months — through March 15 of the new year — to use your prior-year FSA balance on new eligible health expenses. At the end of this grace period, all unspent prior-year funds must be forfeited to your employer.
If you spend more money on health care than the balance in your FSA, you pay the difference out-of-pocket with taxable dollars. So it’s important that the amount of salary you agree to have deposited in your FSA matches as closely as possible the amount you expect to spend on medical expenses during the course of the year.
Typically, you cannot use an FSA to pay for health insurance premiums or preventive care such as annual dental exam. An FSA may or may not cover expenses for braces and dental implants. Ask your plan administrator or human resources representative at work for details.
Dental Benefits in Health Reimbursement Arrangements (HRAs)
A health reimbursement arrangement (HRA) is similar to an FSA, except that you don’t lose the money if it isn’t spent within a certain time period. And, unlike an FSA, you usually can use pre-tax dollars in an HRA to pay for preventive care such as dental exams.
You also can use funds in an HRA to pay for your health insurance premiums.
As with a flexible spending account, to set up an HRA, your employer will:
- Sponsor a menu of employee benefits, similar to those listed under the cafeteria plan, that you can choose from.
- Deposit a certain amount of your pre-taxed salary (employer contribution) in an account you can use for these qualified health care costs.
Your employer may apply the pre-taxed portion of your salary to your HRA account either in one lump sum at the beginning of the year or on a monthly basis. Money credited to an HRA does not accrue interest.
You can withdraw HRA funds at any time to reimburse qualified medical expenses, even if your account has not yet been credited with sufficient funds. You do not have to pay a penalty or income taxes on the withdrawal.
Also, funds contributed to an HRA can be carried over from year to year. In other words, if you don’t use it, you don’t lose it.
If your medical costs exceed the amount of money your employer has promised to credit to your account in a given year, you must pay the overage out-of-pocket.
Your employer may impose certain restrictions on your HRA. For example, you may be required to purchase a high-deductible health insurance plan. The deductible for such a plan typically is eligible for reimbursement from the HRA. In addition, this would put you in a position to open a health savings account.
Health Savings Account (HSA) Dental Benefits
A health savings account can be set up when you also have regular health insurance with a high deductible.
An HSA may be employer-sponsored, or you can set one up independently, whether you are an employee or a self-employed individual. In either case, you must purchase a high-deductible health insurance plan to open an HSA, and the amount of money deposited into the account cannot exceed the annual deductible of your regular health insurance plan.
An HSA can be opened at a bank or other kind of financial institution and money deposited in a health savings account accrues tax-free interest. Also, you can use funds in your HSA to pay for preventive care such as routine eye exams and dental care.
To qualify for an HSA:
- You must purchase a qualified, high-deductible health plan (HDHP). You must not be covered by other health insurance (besides your HDHP).
- You must not be enrolled in medicare .
- You cannot be claimed as a dependent on someone else’s tax return.
Annual dollar limits associated with HSAs are determined by the U.S. Treasury Department and the Internal Revenue Service. For 2018, these limits include:
- The maximum annual amount you can deposit into an HSA is $3,450 for an individual and $6,850 for a family. If you are age 55 or older, you can contribute an extra $1,000 to your individual or family HSA.
- The minimum deductible associated with a qualifying high-deductible health plan is $1,350 for individual coverage and $2,700 for family coverage.
There also are limits on “out-of-pocket” expenses associated with an HSA-compatible, high-deductible health plan (HDHP). In 2018, annual out-of-pocket expenses (deductibles, copayments and other amounts, but not premiums) cannot exceed $6,650 for individual HDHPs and $13,300 for family HDHPs.
There may be some restrictions on opening an HSA if you already have an FSA or HRA sponsored by your employer. See your human resources representative at work or your family accountant for details.
You also can learn more about HSAs by visiting the U.S Treasury Department’s website.
Seek Professional Advice About Your Health Care Coverage
Dental care can result in considerable expenses that can have unexpected consequences to your family budget. Also, eligibility requirements and other criteria of programs such as FSAs, HRAs and HSAs can change from time to time.
To get the latest information about these programs and to make sure you are doing all you can to reduce the cost of your health care (including dental care), consult with a professional accountant or financial advisor who is knowledgeable about these matters.