In This Article
What Is a Limited Purpose Flexible Spending Account (LPFSA)?
A Limited Purpose Flexible Spending Account (LPFSA) is a specialized healthcare savings account employers offer. It complements a High Deductible Health Plan (HDHP) and a Health Savings Account (HSA).
The LPFSA allows individuals to set aside pretax funds for dental and vision expenses. Unlike a regular Flexible Spending Account (FSA), it has restrictions on the types of expenses it covers. Typically, it includes dental cleanings, orthodontics, vision exams, eyeglasses, and contact lenses.
Contributions to the LPFSA are subject to limits, and unused funds may not roll over into the next plan year. Careful estimation of eligible expenses is crucial to avoid losing any unspent funds.
What does a Limited Purpose FSA do?
The LPFSA will only pay medical or dental expenses for individuals with inactive health savings accounts. Unlike an FSA, there are two types, the LPFSA and the HSA. The LPFS for qualified expenditures allows HSA funds to be spent elsewhere. HSA balance holders also have the potential to receive interest and investments, unlike LPFSA.
How a Limited Purpose Flexible Spending Account Works
Generally speaking, you cannot open a normal FSA if you have an HSA. An LPFSA is distinct from a standard FSA. You can use pretax money from a standard FSA to pay for eligible medical expenditures, such as dental and eye costs. You can utilize pretax money from an LPFSA to pay for eligible dental and vision costs.
When your health care plan doesn’t cover the cost of preventative care, you may be able to utilize pretax money from an LPFSA to offset those costs. The plan your company has put up will determine whether you may or cannot.
Only after you have met your health insurance deductible, if your plan permits it, may you utilize an LPFSA to cover any further eligible medical expenses (beyond dental and eye care costs).
Like an FSA, an LPFSA is only accessible to you if your company provides it; you cannot start an account on your own. Both have an annual contribution cap of $2,850 under federal law in 2022 and $3,050 in 2023. Each year, the contribution amount is often raised to reflect inflation.
A qualified cost may include dental treatment or medical expenses that are not covered under IRS rules and regulations. You will receive reimbursement for any eligible medical expenses when you meet your medical insurance premium.
You must meet the deductible and complete the claim verification to reimburse medical post-deductible expenditures through a card. Suitable expenses may be taken on your behalf by a partner in marriage or by your dependent.
Your employer’s benefits package determines enrollment eligibility for a Limited Purpose Flexible Spending Account (LPFSA). Typically, LPFSAs are available to employees as part of their employer’s offering. To be eligible for enrollment in an LPFSA, you must be an employee of a company that provides this benefit.
During the employer’s open enrollment period, which usually occurs annually, you can choose to participate in the LPFSA if it is offered. Reviewing your employer’s provided information on eligibility requirements and any specific enrollment criteria is important.
It’s important to note that LPFSAs, like other types of flexible spending accounts, cannot be opened individually. They are exclusively available through employer-sponsored benefit plans.
Carryovers and Grace Periods for an LPFSA
To avoid losing any unused balance, it’s important not to contribute excessively to your Limited Purpose Flexible Spending Account (LPFSA). LPFSA plans may offer either a rollover provision or a grace period, but rarely both, and some plans may not have either option.
Losing unused funds means losing pretax dollars, impacting potential tax savings. If you have a small excess balance, consider using it for eligible expenses like extra glasses, pre-purchasing contact lenses, or buying a contact lens solution.
In cases where your employer’s LPFSA allows spending the balance on any qualified medical expense after meeting your deductible, it becomes more complex. Reviewing the previous year’s medical costs and comparing them to projected qualified medical expenses for the upcoming year is crucial to assess if they exceed your deductible.
By carefully managing your LPFSA contributions and eligible expenses, you can make informed choices to optimize fund utilization and maximize tax savings. Balancing contributions, understanding plan provisions, and evaluating future medical needs are key to maximizing your LPFSA.
5 Tips for Using a Limited Purpose FSA
Understand eligible expenses
Familiarize yourself with the list of qualified dental and vision expenses that your LPFSA can cover. This includes dental cleanings, orthodontics, vision exams, eyeglasses, and contact lenses. Knowing the eligible expenses will help you plan your contributions and make informed decisions about using your funds.
Estimate your expenses accurately
Take the time to estimate your dental and vision expenses for the upcoming year. This will help you determine an appropriate contribution amount to your LPFSA. Avoid contributing more than you expect to spend to prevent losing unused funds at the plan year’s end.
Keep track of deadlines
Be aware of important deadlines related to your LPFSA. This includes the enrollment period, submission deadlines for reimbursement claims, and any grace period or run-out period to use remaining funds from the previous year. Stay organized and submit claims promptly to ensure you don’t miss out on eligible healthcare expenses.
Maximize tax savings
Remember that contributions to your LPFSA are made with pretax dollars, reducing your taxable income. This can result in significant tax savings. Keep track of your LPFSA contributions and consult with a tax professional to fully understand the tax benefits and how to maximize your savings.
Read the plan documents and stay updated on any changes or updates to your LPFSA. Understand the rules and regulations your employer and the Internal Revenue Service (IRS) set. This will help you make informed decisions, navigate the guidelines effectively, and maximize your LPFSA benefits.
By following these tips, you can effectively utilize your Limited Purpose FSA, optimize your tax savings, and take care of your dental and vision expenses efficiently.