The yearly open enrollment has started. In this article I will explain the basic concepts and common concerns, and hope this helps you to make the right decision.


High Deductible Health Plan (HDHP) is a health insurance just like any other but with high deductible.

To qualify for HDHP, it must meet the minumum deductible and maximum out of packet requirements. For 2018, the dollar amounts are listed below:

Year Minimum deductible (single) Minimum deductible (family) Maximum out-of-pocket (single) Maximum out-of-pocket (family)
2018 $1,350 $2,700 $6,650 $13,300

For other years and more informarion, please click hdhp.

With high deductible, you pay low premium. This is ideal for those who do not expect to have major medical expenses. If you do, you pay up to your out of pocket maximum, and insurance will pay the rest without upper bound. This is what the insurance should be: you pay what you can afford, and insurance pays what you cannot.

HDHP has another advantage, Health Savings Account, or HSA. However before we can talk about HSA, I have to explain what FICA tax is.


The Federal Insurance Contributions Act (FICA) tax, also called payroll or employment tax, is a tax imposed to fund Social Security and Medicare. The employee and employer each pays 50%. The employee’s portion is reported in W-2 Box 4 (social security tax) and Box 6 (medicare tax). Click w2 to see the boxes. The employee’s portion of social security tax is 6.2% up to $128,800 (2018) and medicare tax is 1.45% without limit plus additional medicare tax on Form 8959.

The self employed person pays 100% of the FICA tax in the form of self employment tax with a deduction of 7.65% on the base amount. The F1 students in CPT are exempt from the tax, but usually smaller companies with little experience hiring foreign workers collect FICA tax they should not.

For more information on FICA tax, click fica.


If you participate HDHP, you can have Health Savings Account, or HSA, which is an investment account for medical purposes with the tax advantages:

  • Contribution is tax deductible up to a limit
  • Gain from investment is tax free

Contribution come from:

  • Payroll deduction
  • Personal contribution

Both are income tax deductible. Payroll deduction is also free rom paying FICA taxes while personal contribution is not.

IRS puts limit on how much you can contribute, for 2018 the dollar amounts are:

Year Contribution Limit (Single) Contribution Limit (Family) Catch-Up Contribution (55 or older) (Single and Family)
2018 $3,450 $6,900 $1,000

For other years and more information, click hsa.

Then what happened to Health FSA? we will talk next section.

FSA (Health)

The Health Flexible Spending Account, or Health FSA, is the pretaxed account to pay for health care expenses. If you have HDHP and HSA, you are eligible to Limited Purpose FSA, which can be used to for dental and vision expenses only, not medical expenses.

Traditionally, it has a use or lose policy, but a recent development allows up to $500 carryover to next year. You should contribute to health care FSA when you maxed out the HSA (if you has HDHP and qualify for HSA), and the maximum contribution should be the projected expenses less existing balance in FSA plus $500 (or the plan limit if lower).

Example, if you have $200 existing balance, and you projected expenses are 600, you should contribute up to $600 - $200 + $500 = $900. Let us verify it, with your $900 contribution and $200 existing balance, your available balance is $1100. After deducting $600 expense, you year end balance is $500 which can be carried over to next year.

The gory detail of the Health FSA carryover rules can be found by click carryover.

FSA (Dependent)

For dependent care, you have a choice to use the pretaxed Dependent care FSA, or claim the dependent care credit on Form 2441, or a combination of both. What is the difference between the two and which one I should use?

  • First of all, the rate is different. The dependent care FSA saves taxes on your maximum tax rate (tax bracket) plus FICA taxes, while tax credit saves income tax only at a rate between 20% and 35% depending on income level as listed on Form 2441. If you taxable income is more than $43,000 and tax bracket is more than 20%, you should use dependent FSA instead of tax credit.

  • Secondly, the limit. You can put $5,000 per household in dependent care FSA regardless regardless how many children you have, while you can claim up to $3,000 (for one child) or $6,000 (for two or more children) less what you put in dependent care FSA. For example, if you have one child, you can put $5,000 in dependent care FSA and claim 0 tax credit. If you have two or more children, you can still put $5,000 in dependent FSA and claim up to $1,000 tax credit if you do have more than $6,000 qualified expenses.

  • Thirdly, forfeit and adding back. If you set up dependent care FSA but you do not have qualified expenses, the money will be forfeited but you do not pay tax on the amount forfeited. If you use the money to pay to qualified expenses, but you cannot claim the child (for example, you ex claimed it), then the amount needs to add back and be taxed. With out of pocket expenses, there is no forfeit, and no adding back because nothing was deducted in the first place. If you cannot claim the child, you just cannot claim the credit.

Dependent FSA is reported on box 10 of w2. Unlike a health FSA, a dependent care FSA can’t have a carryover feature.

HSA versus FSA (Health)

\ HSA Health FSA
Ownership You Employer
When to contribute Set at open enrollment Any time
Limit 3450(Self) / 6900(Family) + 1000(Catchup) (2018) 2650 per FSA (2018)
Fund availability When contributed First day
Investment Yes No
Carryover Unlimited Up to $500
Tax documents needed 1099-SA (distribution) and 5498-SA (contribution) or equivalent information W-2

I hope the information is useful. The tax laws are complicated, I tried to cover the most common cases, but I still find it hard to explain it in simple terms. If you need further clarification, please ask.

Orthodontia (braces) and FSA (and HSA)

Unless the orthodontic treatment is 100% cosmetic, it is eligible flexible spending because irs said (teeth whitening is not):

You can include in medical expenses the amounts you pay for the prevention and alleviation of dental disease. Preventive treatment includes the services of a dental hygienist or dentist for such procedures as teeth cleaning, the application of sealants, and fluoride treatments to prevent tooth decay. Treatment to alleviate dental disease include services of a dentist for procedures such as X-rays, fillings, braces, extractions, dentures, and other dental ailments.

Normally you can only to use fund from FSA to pay services provided in the same year. However orthodontic treatment can last as long as eighteen months, and expensive and people often opts to use pay for services through a payment plan.

I cannot find the primary source information how the payments are reimbursed, but Pro Benefits, a service administrator, stated in their website:

Previous informal IRS guidance has confirmed that it is permissible for orthodontia expenses to be reimbursed according to a deferred payment plan. This method is especially helpful for participants who do not do lump-sum payments or who have significant expenses over a multi-year period.

Another plan administrator wageworks has this to say:

Setting up monthly recurring Pay My Provider payment requests are the easiest way to pay monthly orthodontic expenses. This method also ensures your orthodontic payments will be spread out across multiple plan years so you can make the most of your plan (given applicable maximum election amount).

and it continues:

If you paid a lump sum in the prior calendar year and were reimbursed a prorated amount, the unclaimed amount can be reimbursed in the current plan year (if you are still receiving orthodontia services) by providing a copy of the payment information, claim form and a letter indicating the amount you were reimbursed in the prior year.

For recurring payment, you’ll need to submit a contract instead of an invoice which has the following information:

  • Provider name
  • Patient name
  • Description of service
  • Payment schedule, including dates of service
  • Payment amount

Payment plan is less a problem for HSA because it does not have use to lose rule.