How Do Limited Purpose FSAs Work? - SmartAsset

With a limited purpose flexible spending account (LPFSA) you can pay for dental and vision care expenses using pretax dollars. LPFSAs are usually paired with health savings accounts (HSAs), which require belonging to a high-deductible health plan. Like HSAs, LPFSAs have a cap on annual contributions and contributions can only be used for qualified healthcare expenses. Only some employers offer LPFSAs and, unlike HSAs, employees can’t set them up on their own. Also, unlike HSAs, LPFSA funds have to be used before the end of the year or they are lost. To find the most economical way to cover your healthcare costs, consider talking to a financial advisor.

Limited Purpose Flexible Spending Account (LPFSA) Basics

An LPFSA is a special type of flexible spending account (FSA). Funds in a regular FSA can be used to pay for a variety of expenses, but are usually used for healthcare costs. An LPFSA is designated for specific expenses, usually dental and vision costs not covered by health plans.

Like FSAs, contributions to the accounts are made pretax. When money is withdrawn and spent for qualified expenses, it also escapes taxation. These tax benefits make for savings equivalent to roughly 30% for a typical taxpayer. That is taking into account the avoidance of federal income tax and Social Security and Medicare taxes.

Funds can be contributed to an LPFSA as deductions from the employee’s paycheck. The employer can also make separate contributions. There is an annual limit on employee contributions. The limit for 2022 is $2,850. This limit adjusts periodically. For 2021, it was $2,750. Employer contributions do not count against the cap on employee contributions.

LPFSA vs. Health Savings Account (HSA)

A health savings account (HSA) is a savings account where you can put pretax dollars for the sole purpose of using that money on eligible healthcare expenses. In order to qualify for an HSA you must be enrolled in a high-deductible health plan. These health plans must have a deductible of $1,400 for a self-directed plan or $2,800 for a family plan.

An employee with a regular FSA cannot also have an HSA. This restriction does not apply to LPFSAs, and HSAs and LPFSAs are often used together. The LPFSA funds may be used for routine care, while the HSA funds are retained for unexpected future expenses.

Unlike HSA funds, money in an LPFSA account must be used before the end of the year or forfeited. Because of this use-it-or-lose-it feature, LPFSA owners generally try to carefully estimate their healthcare costs over the coming year and arrange to contribute close to the expected amount of expenses.

There can be exceptions to the use-it-or-lose-it feature of LPFSAs. Employers can give employees the option to roll up to $570 in LPFSA funds into the next year. Or they can provide a grace period of 2 1/2 months after the end of the year during which employees can use any remaining funds from the prior year. If funds aren’t used by the end of the year or the grace period, the money reverts to the employer.

LPFSA Qualifying Expenses

LPFSA funds can only be used for qualifying expenses. These expenses are mostly dental and vision expenses as well as other medical expenses in excess of the plan’s deductible. It’s typically used as a supplement to help pay for things that the money saved in your HSA isn’t going to cover related to eye care or dental care. Expenses that can be eligible for payment with an LPFSA include:

Eye exams
Eyeglasses
Contact lenses
Prescription sunglasses
Cataract surgery
Lasik surgery
Dental services
Fluoride treatment
Orthodontia services
Braces
Retainers

LPFSA Limits

LPFSAs have a number of limitations. To begin with, most employers do not offer LPFSAs, and employees can’t set them up on their own. Another limitation is the cap on employee contributions. For people with large routine health expenses, the allowed amounts may be insufficient to pay for all non-covered care necessary.

Unlike an HSA, you must either use it or lose the funds in your account which is another significant limit on the utility of LPFSAs. Ideally, someone with an LPFSA can accurately budget their eligible expenses for the coming year and arrange to contribute no more than the number of costs they actually incur. If they contribute more, however, this money may be lost if not used before the end of the year or, if allowed by the employer’s plan, rolled over or spent within the grace period.

The Bottom Line

LPFSAs can save significant sums on eligible dental, vision and post-deductible medical costs for employees who have access to them. However, most employees don’t have access and they can’t be set up unless the employer offers them. Contribution limits also place a cap on the number of money employees can set aside for eligible expenses. Finally, the funds usually have to be spent during the year they were contributed, or be forfeited.

Tips for Healthcare Spending

A financial advisor can help you evaluate ways to pay for your health costs. Finding a qualified financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with up to three financial advisors who serve your area, and you can interview your advisor matches at no cost to decide which one is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
Before withdrawing from an LPFSA, be sure it will be used for an eligible expense, and keep records to show that you spent the money appropriately. An account holder who uses an LPFSA to pay for non-eligible expenses may have to pay taxes on the funds withdrawn, and can also incur penalties. It’s also essential not to double-dip, paying for expenses with an LPFSA and then declaring the same expenses as deductible medical costs on a tax return.