Is an HSA or FSA Better for Planned Medical Expenses (Like Your Child’s Braces)?

by Travis Pizel · 18 comments

We’ve known our daughter would need braces for several years. After consulting with an orthodontist, and with the recent loss of her last baby tooth, it’s now time to get serious about getting her teeth straightened out.

With the 2015 health insurance enrollment period coming up soon, we have some options that may be able to make her orthodontic treatment a little easier on the checkbook.

We researched the pros and cons of health savings accounts (HSAs) and flexible savings accounts (FSAs), and here’s what we discovered:

Option 1: Health Savings Account (HSA)

With an HSA, we would contribute a specified amount out of each paycheck pre-tax. Additionally, my employer would contribute $250 semi-annually to the account, for a total of $500 per calendar year. I could then use the funds for my daughter’s orthodontic treatment, without being taxed upon withdrawal.

The other interesting thing about an HSA is that it can be used as an investment opportunity. If the money is withdrawn for non-medical approved uses before the age of 65, it is taxed along with a 20% penalty — but if the funds are withdrawn after age 65, you simply pay income taxes.

Option 2: Flexible Savings Account (FSA)

As with the HSA, a set pre-tax contribution would be deducted from each paycheck. The FSA doesn’t have the benefit of employer contributions, but it is front-loaded, meaning the expected amount of my entire year’s contribution would be available on January 1st.

For example, if I specified that $200 should be deducted from each bi-monthly paycheck, the entire $4,800 I’d anticipate contributing during 2015 would be available for my daughter’s orthodontic treatment on January 1st.

My Decision

One additional caveat of the HSA is that I only qualify to utilize it if I enroll in a high-deductible medical insurance plan. The details of the high-deductible plan don’t meet my family’s health care needs, so I’ve chosen a traditional health care plan, along with an FSA.

The FSA option is really the better choice, given our goal of starting my daughter’s orthodontic treatment as soon as possible. This allows us to walk into the orthodontist’s office in early January and pay her bill in full. Though we will actually be paying for it throughout 2015, we won’t incur any interest charges — and our payments will be made pre-tax.

Have you ever used an HSA or FSA to pay for a planned medical treatment? Which one did you choose and why?

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  • Tony says:

    I was leery of the high deductible as well. But I looked at each individual type of expense and saw that in most cases, the HSA paid more than my PPO policy. The overall deductible (amount I have to pay before the policy kicks in) is quite a bit higher for the HSA, but the difference in premiums between the two plans made up for it. You really have to work through all the numbers for yourself.

    • I think it really depends upon what you want out of your insurance. If you’re comparing year to year out of pocket expenses, that may be the way to go, Tony. I’m looking at it more from a pure insurance perspective….if there’s a catastrophe, what kind of coverage do I want? Thanks for sharing your perspective!

  • Phyl says:

    A note about using the HSA funds after age 65. The withdrawals will not be taxable after age 65 is they are then used for medial expenditures (including Rx’s, glasses, dental) Unfortunately, even with Medicare and a supplement medical plan, we will still have more medical bills at that time than any other time in our lives. We plan to contribute the max until we are 65, then use it for medical bills, still tax free.

    • Good clarification, Phyl – if they are withdrawn for medical expenses, they are tax free. If the HSA had been used essentially as a retirement account and withdrawn for non-medical use, then you pay income tax – but no penalty.

  • Kent says:

    Also the FSA for healthcare and the FSA for dependent care are completely separate things and the funds between the two cannot be co-mingled. When my kids were younger I had both. You have to separately decide how much you will be spending for healthcare and for preschool/daycare and the two accounts are completely separate.

  • Sculli says:

    Agree with all of the points above, but I am mostly just shocked that someone who would write an article to inform others would get the FSA limit so totally wrong!! This is a huge error, and if someone didnt know that the FSA limit is in reality only $2500…that could have a major impact. The tax aspect is also huge and not explained properly.

    • Travis Pizel says:

      That is correct, Sculli, as mentioned in a previous comment I just picked a number out of the air for an example contribution amount that does indeed exceed the FSA maximum contribution. I appreciate you pointing that out as well. Not sure what you believe is incorrect regarding the tax aspect (I didn’t mention any such tax aspect for an FSA other than it’s contributed to pre-tax). The tax information that I included for the HSA was taken directly from the documentation given to me from my employer.

  • fredjohnson says:

    I’ve been using an HSA for a few years now and maxing my contributions to it each time. I don’t use the money to pay medical bills—not yet anyway. You can put around $6500 a year into one these days. I have all the HSA money invested in Vanguard index funds and a couple of individual stocks. I plan on holding them there for many years. With the growth in my stocks, the HSA is now worth around $50,000. I think I’ve had if for about 4 years now.

    • Travis Pizel says:

      Good for you FredJohnson, if you don’t have any medical bills, using it as another tax free investment strategy is a great path!

  • Nick says:

    Couple more points. The majority of FSA funds don’t carry over to the following year. Just recently the new rule has enacted $500 to be rolled over year to year. But FSA is use it or lose it.

    HSA does have contribution limits and you can keep it for life as mentioned by Kent, but if you know the amount you will need to pay towards these cost, either FSA or HSA work to your advantage.

    As you say, HSA may not be offered as an insurance in which case use the FSA.

    Both are totally underutilized vehicles. Money goes in tax – deferred and comes out tax free. What other vehicle does this?

    • Travis Pizel says:

      Good point on the rollover, Nick – I don’t plan on rolling any funds over, not at least until the braces are paid for. 🙂

      Doing the research for this article has certainly opened my eyes for the positives of both…unfortunately I don’t think I’ll ever be able to use the HSA since I don’t ever plan on enrolling in a high deductible medical plan.

      thanks for sharing your thoughts!

      • Stephen says:

        If your family is in good general health with no chronic conditions then HDHP usually works well.
        You still get a free annual check up and the part most people miss is that the claims are still processed by your insurance carrier so that headline cost of an in network doctor visit of $650 or blood test for $400 are adjusted down to $125 and $2.47 (or whatever they negotiated) and you only pay the smaller number.
        The rest, as (almost) explained by others is the triple tax advantage of the HSA, not even a 401k does that. Tax deduction on the way in, tax free growth and tax free withdrawal for relevant medical expenses. Even in retirement Medicare Part A or B, Medicare HMO and employee premiums for employer sponsored health insurance can be paid from an HSA.

  • Kent says:

    Aks is completely wrong. The list of qualifying medical expenses is the same for for both FSAs and HSAs (and also is the same list if you are deducting medical expenses outright). Braces and vision are definitely included.

    http://www.irs.gov/publications/p502/ar02.html#en_US_publink100014906

    Not mentioned is the huge advantage of being able to use the HSA as a tax-free savings account. Because of the rules of the HSA you do not have to pull the money out when the medical costs are incurred, you can do it years later.

    So, for example as a family you can dump about $6500 into your HSA every year. After 10 years your account will be $6500 (or probably closer to $100,000 as the contribution limit increases and you earn returns on the money if you do something like invest it in a low cost index fund).

    During those same 10 years you keep track of all of your unreimbursed medical expenses. Just save up all those receipts and insurance statements showing what you are paying out of pocket for medical costs. For a typical family with deductibles it might be $1500 a year. So after 10 years you have 10 years of medical receipts totaling about $15,000.

    Now at any time you can withdraw tax-free any amount you want from your HSA for any purpose up to the $15,000 you have in old medical receipts that “cover” the withdrawal. In effect it is a 100% tax free emergency fund or vacation fund or whatever. It combines the tax deduction of the traditional TRA with the tax free withdrawal of the Roth. In effect you get the benefits of both a traditional IRA and a Roth in a single account. There is nothing else out there t at comes close.

    • Travis Pizel says:

      I agree, Kent – the documentation I got from my employer regarding my FSA option states I could use it for my daughter’s orthodontic treatment.

      I do appreciate the extra info on how to use an HSA as an investment vehicle – however in my case I actually want to use it for medical expenses – at least for now!

      Thanks for sharing the info!

  • Aks says:

    Payment for braces or for that matter any dental or vision expenses are not eligible to pay out from hsa. Also there is a limit by irs of $2500 on fsa, most likely if u have hsa. Braces run 2-3 yrs so I plan to use fsa over that period.

    • Travis Pizel says:

      I don’t agree about not being able to use my FSA for dental, Aks, when I wrote the article, I was looking squarely at the FSA attributes given to me by my employer. I did, however, give a bad example for the contribution amount. I do believe you’re right regarding the $2500 contribution limit – I just picked a number out of the air and it turned out to provide an incorrect example. Thanks for reading!

    • Stephen says:

      Payments for Braces and dental and vision are eligible from an HSA.
      I think you are confused with the rule that payments for medical and prescription expenses cannot come from an FSA until the HDHP deductible limit has been reached.
      EG You have a HD plan with a $2500 medical and prescription deductible you can pay that from your HSA, not your FSA. When you have hit that $2500 you can then use the FSA for the next dollar.
      Dental and Vision can always be paid from a FSA.

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