What Is a Limited Purpose FSA & How It Could Help You Save

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Learn how a Limited Purpose FSA allows you to use pre-tax funds to pay for qualified dental and vision expenses, while letting you continue saving your pennies in an HSA.

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Editor’s note: This post was originally published on March 4, 2020 and updated on September 28, 2020.


So you need glasses. Or a root canal. Or braces. You’re ready to take care of yourself, but you’re wondering, how am I going to pay for this? A Limited Purpose FSA (LPFSA) might be the answer.

What Is a Limited Purpose FSA?

There’s a good chance you’ve already heard of a Flexible Spending Account (FSA). Flexible Spending Accounts are accounts that let you use pre-tax funds to pay for certain out-of-pocket medical expenses. Many employers offer FSAs in addition to a health insurance plan as another way to pay for healthcare expenses.

Limited Purpose FSAs are aptly named — they are FSAs that can only be used for a limited purpose. That limited purpose is paying for qualified dental and vision expenses. LPFSAs can help you save money because they are funded with pre-tax dollars. You can save up to 30% paying for expenses with an LPFSA versus with after-tax funds (depending upon your tax bracket).

It’s important to remember that you can’t contribute to a Healthcare FSA and an HSA at the same time. But you can contribute to a Limited Purpose FSA and an HSA at the same time. This can be very beneficial to you.

You can use your LPFSA to pay for dental and vision expenses while building up your HSA savings. Your HSA savings come with you even after you leave your job, and you can keep using them as you age. Quick Tip — you can’t use both your LPFSA and HSA to pay for the same expense, so make sure you keep track of everything.

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How Do I Get a Limited Purpose FSA?

You can only have a LPFSA if your employer offers one. Typically it will be in conjunction with a High-Deductible Health Plan and HSA offering. If you want to take advantage of your employer’s LPFSA, you must elect to do so during open enrollment.

At that time, you will choose the amount you want to save for the year. You will be able to see how much pre-tax money will come out of each paycheck to fund the account. Once you have made your selections and enrolled, your employer will fund the account and deduct the contributions from your paychecks accordingly.

How Much Can I Contribute to My Limited Purpose FSA?

You can choose how much to contribute to your LPFSA up to the IRS limit. The IRS contribution limit changes every year. In 2021 it is $2,750.

Employer contributions to a LPFSA are not included in your annual limit. This means that you can contribute the max $2,750. And have your employer make contributions over this amount if they choose to do so. This is a unique feature of LPFSAs.

How Do I Choose How Much to Contribute to My Limited Purpose FSA?

When thinking about how much to contribute to your LPFSA, a good place to start is reviewing all the dental and vision expenses you and your family had during the previous year. Tally up how much you spent out-of-pocket on these costs. Then consider how much you can afford to have taken out of your paycheck this year. This can help guide how much you should contribute.

It’s important to remember that you must use your contributions by the end of the plan year or else risk losing what’s left. After the plan year, your employer has the option to offer you either a 2.5 months grace period to use the remaining funds OR a $550 rollover of contributions from 2020 to 2021. If you choose to rollover funds from one year to the next, it doesn’t affect the next year’s contribution limit.

Also, keep in mind that once you have chosen a contribution amount you can only change it if there is a Qualified Live Event (QLE). This includes the birth of a child, a marriage, a dependent who has aged out of coverage. Or a parent who has recently come under your full-time care, or your spouse losing their job.

What Can I Use My Limited Purpose FSA For?

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Once you’ve got a Limited Purpose FSA you may be itching to start spending on your expenses. But you’ve got to make sure you follow the rules when it comes to spending your LPFSA dollars. The IRS decides what counts as a “qualified expense” for Limited Purpose FSAs. You can use your account to pay for the following eligible dental and vision expenses for yourself, your spouse, and your dependents.

You can use an LPFSA to pay for any qualified medical expenses after you meet your health insurance deductible. Once the health plan deductible has been met, the LPFSA converts into a Health Care FSA and can be used for other eligible expenses in addition to vision and dental.

Limited Purpose FSA Qualified Expenses:

Vision

  • Copays
  • Deductibles
  • Office visits
  • Diagnostic services
  • Transportation expenses to receive care
  • Eye exams
  • Glasses and cleaning tools
  • Contacts and solution
  • Braille books and magazines
  • Treatments (prescription and over-the-counter)
  • Guide dogs (dog, training, care)
  • Eye surgery (including laser and Lasik)

Dental

  • Copays
  • Deductibles
  • Office visits
  • Diagnostic services
  • Transportation expenses to receive care
  • X-rays
  • Non-cosmetic surgery for dental care and reconstruction
  • Dentures, bridges, denture adhesive, and denture cleaner
  • Treatments (prescription and over-the-counter)
  • Orthodontia
  • Guards for teeth grinding

How Do I Use My Limited Purpose FSA?

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Limited Purpose FSA funds are distributed either via a debit card or reimbursements. Some employers choose to give you access to your funds with a debit card. You can swipe the payment card to directly pay for out-of-pocket expenses at the provider’s place of business. If your employer doesn’t offer a debit card option then you must pay for your expenses with your personal funds and submit proper documentation to your plan administrator for reimbursement.

What Happens If I Leave My Employer?

Situation 1: You leave your employer mid-year, and you have already used all of your LPFSA funds.

LPFSAs are funded at the beginning of the year by your employer. And then you slowly pay back that contribution each paycheck. If you leave before the end of the year, you do not need to worry about paying for the funds you have used. Your employer will cover the cost.

Situation 2: You leave your employer mid-year, and you haven’t used your LPFSA funds.

The only way to continue contributing to your LPFSA and using your funds is to enroll in COBRA coverage. If you won’t be enrolling in COBRA coverage, then you will lose the unspent funds in your LPFSA. If your job departure is planned, you'll want to use your funds on qualified expenses before you leave.

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The Bottom Line

Limited Purpose FSAs are a great way to use pre-tax money to pay for out-of-pocket dental and vision expenses.

Possible Pitfalls:

  • Only available to spend on certain qualified expenses.
  • Use it or lose it. Some plans allow a certain amount of unused funds to roll over year to year, while others have no rollover at all. For example, in 2020, you’re allowed to roll over $550 over into the 2021 plan year.

Big Benefits:

  • Funded with pre-tax dollars. Save up to 30% on expenses (depending on your tax bracket).
  • Use your LPFSA instead of your HSA and continue saving HSA funds for the future.

Disclaimer: the content presented in this article are for informational purposes only, and is not, and must not be considered tax, investment, legal, accounting or financial planning advice, nor a recommendation as to a specific course of action. Investors should consult all available information, including fund prospectuses, and consult with appropriate tax, investment, accounting, legal, and accounting professionals, as appropriate, before making any investment or utilizing any financial planning strategy.

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