A limited purpose flexible spending arrangement (LPFSA) is a tax-advantaged flexible spending account (FSA) that allows you to pay for eligible dental and vision expenses. This plan is funded using pre-tax contributions and can be combined with a health savings account (HSA).
The LPFSA is more restrictive than a standard FSA. You're limited to using it for uncovered dental and vision expenses. Other medical costs you will need to pay from your HSA.
- 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.
- Contributions are made using pretax dollars, which lowers a participant's taxable income.
- The IRS caps the maximum contribution limit and adjusts the amount annually for inflation.
- If the employer allows it, employees may be able to carry over unused portions up to a certain amount to the following year.
How Limited Purpose Flexible Spending Arrangements (LPFSAs) Work
A limited purpose flexible spending account is only available through an employer. You can't open one if you are self-employed, unemployed, retired, or work for a business that does not offer them. Contribution limits are adjusted annually by the Internal Revenue Service (IRS) for inflation and are capped. Individuals can set aside $2,850 in an LPFSA in 2022. In 2023, that amount rises to $3,050.
LPFSA accounts offer tax benefits by allowing you to contribute pretax dollars. This reduces your taxable income and, therefore, your tax liability. But even though contributions are not taxable, LPFSA expenses cannot be deducted during tax filings because they are already used to pay for medical treatment.
You can use your account to pay for preventive care expenses not covered by your 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. Keep in mind, that 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
- Vision exams
- Contact lenses
- 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 a high-deductible health plan (HDHP), dental insurance, and vision insurance.
Some other preventive costs incurred in an HDHP might be eligible for reimbursement after the plan holder meets the deductible, but only if the plan design allows this.
Employers deduct LPFSA contributions in equal amounts from each paycheck. For example, if a bi-weekly paid employee opts to contribute $2,850 for the 2022 tax year, the employer deducts $109.61 ($2,850 for 26 weeks) from each paycheck.
The entire benefit is accessible even if you haven't fully funded the account. If you need surgery at the beginning of the year but have only made one contribution so far, the full amount of $2,850 is available for your use.
Some employers may place lower contribution limits on their accounts. Employees cannot invest in both FSAs and LPFSAs at the same time.
Using an LPFSA
Usually, you can access your LPFSA funds with a payment card. If that option isn't available, you'll need to submit claim forms, itemized receipts, and the explanation of benefits. If your expense is approved, you'll be reimbursed by check or direct deposit.
Plans are considered 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, your plan may offer one of two options:
- Carryover: Up to $570 may be carried over from 2022 to 2023 (rising to $610 in 2023)
- Grace period: Remaining balance can be used within the first 2 1/2 months of the following year
If neither of these options is available, or if you have more remaining in your account than the year's carryover limit, you'll lose the remaining funds. Plans are not required to include these provisions, so not all employers offer them.
What Is the Use-It-or-Lose-It Rule?
The use-it-or-lose-it rule is a rule implemented by the IRS that states that any money leftover in a flexible spending account FSA at the end of the plan year will be forfeited. If your FSA has a carry-over feature, then a certain amount can be carried over in accordance with IRS rules. Health FSAs and dependent care programs are sponsored by employers under 'cafeteria plans.'
What Are the Contribution Limits for a Limited Purpose FSA?
The limited purpose FSA limit for 2022 is $2,850, with a carryover limit of $570. These rise to $3,050 and $610, respectively, in 2023.
Can You Have a Limited Purpose FSA With an HSA?
Yes, you may have a limited purpose FSA with an HSA. Pairing these accounts together gives you the benefits of both accounts as limited purpose FSAs apply only to dental and vision, and some other preventive costs.