Many of you are familiar with healthcare Flexible Spending Accounts (FSAs). Employees set aside a portion of their pay before taxes are calculated and use the money to pay eligible medical expenses. Less well-known is the Limited-Purpose FSA (LPFSA). Here are 4 things to know about limited-purpose FSAs.
What do Limited-Purpose FSAs do?
The LPFSA can only be used to pay eligible vision and dental expenses for those who also have a Health Savings Account (HSA). Unlike a regular FSA, you can have an LPFSA and HSA at the same time. Using the LPFSA for qualified expenses leaves more in the HSA to spend on other medical care. Plus, unused HSA balances can earn interest and investment gains, which LPFSAs do not.
Who are Limited-Purpose FSAs for?
LPFSAs are available only to HSA owners. Employees can actively contribute to both types of accounts, maximizing their tax and savings benefits.
How does a Limited-Purpose FSA work?
Just like a regular FSA, participants set aside money from each paycheck for deposit into the LPFSA. Funds are used to pay for eligible expenses such as eye exams, eyeglasses, contact lenses, dental checkups, fillings, and crowns. LPFSA contributions are subject to the same annual, IRS-mandated limit as the regular FSA.
Qualified expenses incurred by the employee’s tax dependents (spouses and children) can also be paid with LPFSA funds. In addition, depending on the plan setup, unused LPFSA funds may be eligible for carryover to the following plan year.
What about “double-dipping”?
It’s important to remember that ‘double-dipping’ is not allowed. You cannot use LPFSA and HSA funds to reimburse the same eligible expense. When approving claims, some plan administrators automatically reimburse from the LPFSA first, until that balance is used up, then from the HSA. Reimbursed expenses are not deductible again on tax returns, either.
Also note that the IRS counts eligible expenses from their service date, not the billing or payment date. For example, a cavity filled on December 28, 2022, but billed and paid for in January 2023, is a 2022 expense.
The LPFSA is a tax-friendly tool for paying dental and vision expenses. LPFSAs can enhance current cash flow and add to long-term financial security by conserving HSA savings.