What Is a Limited Purpose Flexible Spending Account (LPFSA)?
A limited purpose flexible spending account (LPFSA) is a special type of flexible spending account (FSA) that may be available to consumers enrolled in a health savings account (HSA). An HSA is a type of savings account that lets consumers set aside money on a pre-tax basis to pay for qualified medical expenses. Consumers are typically given the option to enroll in LPFSAs and HSAs through their employers (employers act as sponsors for these types of savings accounts).
Normally, the Internal Revenue Service (IRS) allows you to have either an HSA or an FSA—but not both. However, you can have an HSA and an LPFSA if your employer allows it.
Consumers can use LPFSAs to pay for vision and dental expenses before they've met their insurance deductible. In some cases, an LPFSA can also be used for regular qualified medical expenses after you meet your deductible. However, this depends on the rules your employer has established for the LPFSA account that is offered.
- An LPFSA pays for vision and dental expenses before you reach your deductible and sometimes for certain qualified expenses after you reach it.
- Unlike a standard FSA, it can be used in tandem with an HSA.
- An LPFSA is funded with pretax dollars.
Typically, consumers that have an HSA are not eligible to open a regular FSA. A regular FSA is different than an LPFSA. A regular FSA lets you use pretax dollars to pay for qualified medical expenses, including dental and vision expenses. An LPFSA lets you use pretax dollars to pay for qualified dental and vision expenses, such as dental cleanings, fillings, vision exams, contact lenses, lens solution/cleaner, and prescription glasses.
An LPFSA also lets you use pretax dollars to pay for preventive care expenses that your health plan doesn’t cover. You can only use an LPFSA to pay for any qualified medical expenses after you meet your health insurance deductible, and only if your employer has set up its plan to allow this use of LPFSA funds.
In addition, LPFSAs, like FSAs, are only available to you if your employer offers them; you can’t open an account on your own. Under federal law, both also have an annual contribution limit of $2,750 for 2020 and 2021. The amount is usually increased each year to account for inflation. However, employers can choose to place a lower limit on contributions.
It’s your employer’s choice to offer an LPFSA; you can’t open one on your own.
Limited Purpose Flexible Savings Account (LPFSA) vs. Health Savings Account (HSA)
While you can’t use your LPFSA balance to pay for qualified medical expenses that aren’t dental or vision costs, you can use your HSA balance to pay for these expenses. Just like an LPFSA, an HSA has the advantage of letting you contribute pretax dollars, so it’s a good way to make your out-of-pocket medical expenses more affordable.
Also, even though your employer will withdraw your LPFSA contributions in equal amounts from each paycheck throughout the year, the entire balance is available to you at the beginning of the year. The same is not true of your HSA balance, which only becomes available as funds are deposited. To use the funds you’ve contributed to your LPFSA, your plan administrator will give you a payment card, let you request reimbursement by check or direct deposit by submitting a claim form, or both.
Example of an LPFSA
You should carefully consider how much to contribute to your LPFSA. Let’s say your employer’s plan only allows you to use it for qualified dental and vision expenses. Look over your out-of-pocket dental and vision expenses from the last year or two and determine which ones are considered qualified using your employer’s summary plan document. Then you can use that information to create a list of your projected qualified dental and vision expenses for the coming year.
Your list of the previous year’s expenses might look something like this:
- Dental cleaning number one: $0 (100% covered by insurance as a preventive service)
- Dental cleaning number two: $0 (100% covered by insurance as a preventive service)
- Full set of dental X-rays: $0 (100% covered by insurance as a preventive service)
- Two composite fillings: $100 each, $200 total (50% covered by insurance)
- Eye exam: $50 (80% covered by insurance; you pay extra for contact and glasses fittings)
- Prescription eyeglasses: $200 (not covered by insurance)
- Prescription sunglasses: $150 (not covered by insurance)
- Contact lenses: $100 (not covered by insurance)
- Prescription eye drops: $20 (80% covered by insurance)
You know that next year, you’ll likely have two dental cleanings and a full set of X-rays again. You don’t anticipate any fillings because you have good teeth and rarely need dental work. You’ll get your annual eye exam, and you’ll need another year’s worth of contact lenses. But you won’t need new glasses or sunglasses because you just got them. The prescription eye drops were for an eye infection that you don’t anticipate coming back. Neither your dentist nor your eye doctor has given you a reason to believe that you’ll need anything out of the ordinary in the coming year.
If you take a conservative estimate, you may decide to contribute $720 to your LPFSA. With this amount, you can be fairly confident that you will spend the entire balance. If you want to take a chance on having some extra money to cover something you aren’t anticipating, you might contribute another couple of hundred dollars.
You don’t want to contribute excessively to your LPFSA. Like a regular FSA, it's possible you could lose any unused balance at–or shortly after–the end of the year. Some plans either allow you to roll over up to a certain amount for the following plan year or allow for a grace period. A grace period is a two-and-a-half-month period at the beginning of the following year where you can finish spending the previous year’s balance.
However, a plan won’t have both a rollover provision and a grace period. (And the plan might not have either a rollover option or a grace period.)
During most years, employers may elect one of two ways to let unused FSA funds rollover:
- Account holders can carry over up to $550 from one plan year to the next.
- The grace period option, which allows unlimited funds to be carried over to be spent in the first two-and-a-half-month of the next plan year. At the end of the two-and-a-half-month period, all unspent carried-over funds are forfeited.
For 2020 and 2021, though, special rules apply. Due to provisions of the Consolidated Appropriations Act, employers can allow all unused funds to be carried over from 2020 to 2021 and from 2021 to 2022. Or, employers can extend the grace period to 12 months, rather than 2.5 months. Either way, all unused funds can be carried over and used throughout the entire year.
The only good news about any unused balance you lose is that you’ll be losing pretax dollars. If you’re in the 24% federal tax bracket, that means you’re losing the equivalent of $76 that you could have gotten in take-home pay (for every $100 you contributed to your LPFSA over the $500 rollover amount.)
That being said, if you’ve only contributed a small overage, you might be able to spend it down by purchasing an extra pair of glasses, pre-purchasing next year’s contact lenses, buying extra contact lens solution, or making other qualified purchases. Maybe you don’t really need a second pair of glasses, but you might decide that having them is better than just throwing away the money you've saved.
If your employer’s LPFSA allows you to spend the balance on any qualified medical expense once you’ve met your deductible, the calculation gets a bit more complicated. You’ll definitely want to look at your medical expenses for the last year (or two). Do the expenses that you’re likely to incur next year add up to more than your deductible?
For example, let’s say your high-deductible health insurance plan has a deductible of $3,000, and your projected medical expenses are $3,500. If so, you might want to contribute an additional $500 to your LPFSA (in addition to the vision and dental expenses and any cushion you already calculated).
The Bottom Line
LPFSAs can be a great way to reduce your dental and vision expenses—and in some instances, your other qualified medical expenses—when you have an HSA. These arrangements mean that you don’t have to entirely give up the benefits of an FSA when you have an HSA.
Read your employer’s summary plan description to make sure you know what you can use LPFSA funds for and whether or not your employer's option has a rollover provision or a grace period. At this point, it's in your best interest to do the math and make sure that you contribute enough money to maximize your tax savings (without contributing more than you’ll be able to spend during the year).