Limited Purpose Flexible Spending Arrangement (LPFSA)

What Is a Limited Purpose Flexible Spending Arrangement (LPFSA)?

The term "limited purpose flexible spending arrangement" (LPFSA) refers to a savings plan that can be used with a health savings account (HSA). Unlike a standard FSA, employees may use an LPFSA in conjunction with an HSA. Contributions are made using pretax earnings. A limited purpose FSA is a more restrictive version of a standard health flexible spending account (FSA). That's because the arrangement is reserved for the payment of dental and vision expenses. Some other preventive costs incurred in a high-deductible health plan (HDHP) might be eligible for reimbursement after the plan holder meets the deductible, but only if the plan design allows this.

Key Takeaways

  • A limited purpose flexible spending arrangement is a savings plan for dental, vision, and possibly other expenses not covered by health plans.
  • LPFSAs are only offered through an employer, which means self-employed, unemployed, or retired individuals do not qualify.
  • The contribution limit for an LPFSA for the tax year 2021 is $2,750 (increasing to $2,850 in 2022).
  • The IRS allows individuals to carry over $550 (increasing to $570 in 2022) of unused funds or they may use whatever is leftover within the first 2 1/2 months of the following year.

How Limited Purpose Flexible Spending Arrangements (LPFSAs) Work

A limited purpose flexible spending account works just like a regular flexible spending account in that they are only accessible to individuals whose employers make them available. The LPFSA is not available to the self-employed, unemployed, retired, and employees of a business that does not offer an LPFSA. The 2021 maximum contribution to an LPFSA is the same as the 2020 limit—$2,750 (increasing to $2,850 in 2022). This amount is indexed to inflation.

LPFSAs may come with certain restrictions. For instance, some employers may place lower contribution limits on their accounts and employees cannot invest in both FSAs and LPFSAs at the same time.

LPFSA accounts offer tax benefits. They use up pretax dollars that would, otherwise, have been taxable by putting them into savings accounts. Even though the contributions are not taxable, LPFSA expenses cannot be deducted during tax filings because they are already used to pay for medical treatment.

Here's where they differ from regular FSAs. Plan holders can use their funds to pay for preventive care expenses not covered by their health insurance or other FSA. Most health plans thoroughly cover in-network preventive care expenses with no additional cost to the insured. Added insured costs include deductible requirements and coinsurance, or copayments. The Affordable Care Act (ACA) requires insurers to cover certain preventive services for men, women, and children without additional expense to the insured. 

Qualified dental and vision expenses include dental cleanings, fillings, vision exams, contact lenses, and prescription glasses. Some employers also allow plan participants to use LPFSA funds to pay for qualified medical expenses once they meet their health insurance deductibles. The limitation exists because HSA holders cannot have medical coverage other than an HDHP, dental insurance, and vision insurance. 

Special Considerations

Employers deduct LPFSA contributions in equal amounts from each paycheck. For example, if a bi-weekly paid employee opts to contribute $2,750, the employer deducts $105.76 ($2,750 or 26 weeks) from each paycheck.

The entire benefit is accessible even if not all payments have been satisfied. If the employee requires surgery at the beginning of the year but contributes only once to the account, the full amount of $2,750 is available for their use.  

Using an LPFSA

The funds in an LPFSA are typically accessible via a payment card. If that option isn't available, employees must submit claim forms, itemized receipts, and the explanation of benefits for reimbursement by check or direct deposit.

LPFSA accounts are typically use-it-or-lose-it accounts. Some employers may allow continued use as per Internal Revenue Service (IRS) rules. These rules allow employers to provide individuals with only one of two options if money remains in an LPFSA account at the end of the tax year. Up to $550 (increasing to $570 in 2022) may be carried over to the following year, or the remaining balance must be used within the first 2 1/2 months of the following year.

What Is the Use-It-Or-Lose-It Rule?

The use-it-or-lose-it rule is a rule implemented by the Internal Revenue Service (IRS) that states that any money leftover in a flexible spending account (FSA) at the end of the plan year will be forfeited. For example, if you contributed $500 to an FSA and only used $200, the remaining $300 will be lost. If your FSA has a carry-over feature, then a certain amount can be carried over in accordance with IRS rules.

What Is the Limited Purpose FSA Limit for 2022?

The limited purpose FSA limit for 2022 is $2,850. This is an increase from $2,750 in 2021. Carry-over amounts have increased to $570 from $550.

Can You Have a Limited Purpose FSA With an HSA?

Yes, you may have a limited purpose FSA with a health savings account (HSA). Pairing these accounts together allows you the benefits of both accounts as limited purpose FSAs apply only to dental and vision, and some other preventive costs.

Article Sources

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  7. U.S. Centers for Medicare & Medicaid Services: Healthcare.gov. "Health Benefits & Coverage: Preventive Health Services." Accessed Nov. 15, 2021.