Normally, the 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. You can use your LPFSA to pay for vision and dental expenses before you meet your insurance deductible. In some cases, you can also use it for regular qualified medical expenses after you meet your deductible, depending on what rules your employer has established for LPFSAs.
Let’s take a more detailed look at how limited purpose FSAs work. (If you are not insured through your employer, learn more about buying private health insurance.)
What Is an LPFSA?
When you have an HSA, you cannot use a regular FSA. As a reminder, a regular flexible spending account lets you use pre-tax dollars to pay for qualified medical expenses, including dental and vision expenses. A limited-purpose FSA lets you use pre-tax dollars to pay for qualified dental and vision expenses, such as dental cleanings, fillings, vision exams, contact lenses, lens solution/cleaner and prescription glasses. It also lets you use pre-tax dollars to pay for preventive care expenses that your health plan doesn’t cover – but those expenses should be minimal, since the Affordable Care Act requires insurers to cover numerous services before you meet your deductible and without asking you to pay co-insurance as long as you use in-network providers.
You can only use an LPFSA to pay for any qualified medical expense 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 $2,550 for 2016; the amount is usually increased each year to account for inflation. However, employers can choose to place a lower limit on contributions.
How an LPFSA Complements Your 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 pre-tax 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.
How Much to Contribute to Your 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, see which ones are considered qualified using your employer’s summary plan document and then 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 No. 1: $0 (100% covered by insurance as a preventive service)
Dental cleaning No. 2: $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 again have two dental cleanings and a full set of X-rays. You don’t anticipate any fillings, since 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 since you just got them and 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 reason to believe that you’ll need anything out of the ordinary in the coming year.
Conservatively, then, you could contribute $720 to your LPFSA and be pretty sure 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 hundred dollars.
Just Don’t Put in Too Much
You don’t want to overcontribute to your LPFSA because, like a regular FSA, you’ll lose any unused balance at or shortly after the end of the year. Some plans allow you to roll over up to $500 for the following plan year; if that’s the case with your plan, in this example, you could safely contribute $1,220. Other plans might have a two-and-a-half-month grace period at the beginning of the following year to let you finish spending the previous year’s balance. A plan won’t have both a rollover provision and a grace period, however, and it might not have either. (For related reading, see 4 Reasons to Use Your Benefits Before Year-End.)
The only good news about any unused balance you lose is that you’ll be losing pre-tax dollars. If you’re in the 25% federal tax bracket, that means you’re losing the equivalent of $75 that you could have gotten in take-home pay for every $100 you overcontributed to your LPFSA. That being said, if you’ve only overcontributed a small amount, 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 having them is better than just throwing away that money. (For more on this topic, read Comparing Health Savings and Flexible Spending Accounts.)
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. Again, you’ll 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
Limited purpose FSAs are a great way to reduce your dental, vision and sometimes other qualified medical expenses when you have a health savings account. These arrangements mean that you don’t have to entirely give up the benefits of a flexible spending account 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 it has a rollover provision or grace period. Then do the math to make sure you contribute enough to maximize your tax savings without contributing more than you’ll be able to spend during the year. (For related reading, check out How to Use Your HSA for Retirement.)