While you’re reviewing your employer’s benefits package, all the acronyms can be difficult to keep straight. It doesn’t help that certain acronyms like “FSA” can be a part of larger acronyms like “LPFSA” or “DCFSA” or appear on their own. You could even find all three as options in your employer’s benefits package. 

In this post, we’ll walk you through the difference between an FSA (aka a “Healthcare or General Purpose FSA”) and an LPFSA, what each can be used for and why one or both could make sense for you. As with any benefits options, if you have specific questions about how your employer’s plans will function, reach out to your HR department or your benefits administrator.

What is a Flexible Spending Account?

A Flexible Spending Account (i.e. an FSA), is an account into which employees can deposit pre tax money to pay for eligible medical and everyday health expenses, or dependent care expenses (depending on which type of FSA you have). These types of accounts can only be accessed through an employer and can receive contributions from both the employer and employee. Contributions to these accounts expire at the end of the plan term unless your employer allows you to roll over a portion of your unused balance or offers a 2 ½ month grace period in which to use your money.

There are three types of FSAs:

• Healthcare FSAs or General Purpose FSAs. These are sometimes just referred to as FSAs because they are the most offered form of FSA. The IRS sets the FSA annual contribution limit each year, regardless of the type of health insurance plan you have. So if you and your spouse are both offered an FSA through your employers, you can both sign up for an account and each contribute up to the annual maximum in your separate accounts. Healthcare FSAs can be paired with any type of health insurance plan and the contributions can be used on a wide range of costs like co-pays, coinsurance obligations, deductibles, and even sunscreen. 

• Dependent Care FSAs (DCFSAs). These are FSAs that can be used to pay for child and adult day care expenses that allow the employee to work. Eligible expenses include: preschool, summer camps, after-school care, adult day care for a dependent adult, nanny services, and more. Like with Medical FSAs, these accounts must be offered through an employer and have an annual contribution limit, which is $5,000 per household for 2024. 

• Limited Purpose FSAs (LPFSAs). These FSAs can be used for limited expenses such as dental and vision care. Like both of the previously mentioned FSAs, these accounts have an IRS-imposed annual limit. It can also be paired with any type of health insurance. See the next section for more details. 

For the purposes of this post, we will be comparing General Purpose FSAs and LPFSAs.

What is a Limited Purpose Flexible Spending Account?

A Limited Purpose FSA is an FSA that can be used to pay for qualified dental and vision expenses. These include: co-pays, coinsurance obligations, deductibles, eyeglasses, dental cleanings and exams, eye exams, dental surgery, and more. 

This type of flexible benefit can be paired with any kind of health, dental and vision insurance plans. It is also compatible with all other types of flexible benefits like Medical and Dependent Care FSAs, Health Savings Accounts, and more.

How are they similar?

Health FSAs and LPFSAs are similar in the following ways:

• They must be offered through an employer.

• They have IRS-imposed annual limits. These annual limits are set on a per-person basis so each spouse can sign up for their own account through their respective employers and contribute the maximum allowed.

• Only employers and employees can contribute to the account.

• Account contributions are made pre tax, which means employees could save up to 37% on the expenses for which they use their contributions (depending on their tax bracket).

• Account balances expire at the end of the plan year unless employers allow employees to roll over a portion of the unused balance (also set each year by the IRS) or they offer a 2 ½ month grace period in which to use their money.

• Employees must sign up for these accounts during open enrollment and will select the amount they wish to contribute for the year at that time. Employers will then take the appropriate amount from each paycheck and deposit the money into the employees’ accounts. 

• Employees can only change the amount they wish to contribute to their FSAs if they experience a qualifying life event like the birth of a child or getting married.

• These flexible benefit accounts can be paired with any kind of health, dental and vision insurance plans.

How are they different?

General Purpose FSAs and LPFSAs are different in two key ways:

• LPFSAs can be paired with a Health Savings Account (HSA), while Healthcare FSAs cannot. If an employee has an HSA and wants to participate in their employer’s Health FSA benefit, the employee will have to pause contributions to their HSA while the Healthcare FSA is active. The employee will still maintain access to, and can use, previously made HSA contributions. In the same scenario, the employee could sign up for their employer’s LPFSA to save and pay for dental and vision expenses while continuing to contribute to their HSA.

• Healthcare FSAs can be used to pay for a wide range of medical and everyday health expenses, including dental and vision expenses. LPFSAs can only be used to pay for dental and vision expenses.

Which one is right for me?

First things, first, you don’t have to choose. You could participate in both a Healthcare FSA and LPFSA at the same time if it makes sense for you to do so. Here are some scenarios where it might make sense to pick between the two, or pick both:

1. It might make sense to pick the LPFSA if you’re happy with your current High Deductible Health Plan (HDHP) and want the ability to keep contributing to your HSA. In order to contribute to an HSA, you must be actively enrolled in an HDHP and it must be your only health insurance. If you’re happy with this health insurance option and want to keep contributing to your HSA to save and pay for qualified medical expenses (and even retirement), it could make sense to sign up for an LPFSA to pay for your dental and vision expenses. That way you can save your HSA contributions for big ticket medical costs.

2. It might make sense to pick the Healthcare FSA if you want the freedom to choose between all of the health insurance options, you don’t want to manage two different flexible benefit accounts, and you don’t think you’ll spend more than the annual maximum on your health, dental, and vision expenses combined. 

3. It might make sense to pick both the Healthcare FSA and the LPFSA if you don’t want to sign up for an HDHP, and you think you’ll spend more than the Health FSA annual maximum on health and dental and vision expenses for the plan year. 

Get started with Lively today

Lively is your partner in Flexible Benefits. We offer an award-winning platform through which employees can access highly-impactful and easy-to-use flexible benefit accounts. Whether you’re an employer that’s ready to up-level your benefits package or you’re an individual looking to open a new HSA, reach out to Lively today, we’re ready to help!