What Is a Limited Purpose Flexible Spending Arrangement (LPFSA)

A limited purpose flexible spending arrangement (LPFSA) is a savings plan to be used with a health savings account (HSA). The arrangement is reserved for the payment of dental and vision expenses. A limited-purpose FSA is a more restrictive version of a standard health flexible spending account (FSA). Unlike a standard FSA, employees may use an LPFSA in conjunction with an HSA.

Key Takeaways

  • A limited purpose flexible spending arrangement (LPFSA) is a savings plan for dental and vision expenses.
  • LPFSAs are available depending on the employer. They are not available to the self-employed, unemployed, or retired individuals.
  • Generally, money from LPFSA accounts is not carried over to the next year.

Understanding Limited Purpose Flexible Spending Arrangement (LPFSA)

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 deductible. The limitation exists because HSA holders cannot have medical coverage other than a high-deductible health insurance plan, dental insurance, and vision insurance. There are a few other less common exceptions.

Employees may use LPFSA funds to pay for preventive care expenses not covered by the health plan. However, 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 requires insurers to cover several preventive services for men, women, and children without additional expense to the insured. 

LPFSAs, like FSAs, are only accessible to employees 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 2020 maximum contribution to an LPFSA is $2,700, which is indexed to inflation. Employers, however, may place a lower limit on contributions. You cannot have an FSA and LPFSA at the same time.

LPFSA Contributions and Carry-Forward Amounts

Employers deduct LPFSA contributions in equal amounts from each paycheck. For example, if a bi-weekly paid employee opts to contribute $2,700, the employer deducts $103.80 ($2,700 or 26 weeks) from each paycheck. The entire benefit is accessible even if not all payments have been satisfied. For example, if the employee required surgery at the beginning of the year but contributed only once to the account, the full amount of $2,700 is available for their use.  

LPFSA funds are typically accessible via a payment card. If not available, employees submit claim forms, itemized receipts, and the explanation of benefits (EOB) for reimbursement by check or direct deposit.

LPFSA accounts are “use it or lose it" funds. However, if money remains in the account at the end of the year, up to $500 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. Employers have the flexibility to include or exclude those provisions.

LPFSA accounts offer tax benefits. They use up pre-tax dollars that would, otherwise, have been taxable by putting them into savings accounts. However, LPFSA expenses cannot be deducted during tax filings because they have already been used in medical treatment.