What Is a Limited Purpose Flexible Spending Arrangement (LPFSA)?
The term limited purpose flexible spending arrangement (LPFSA) refers to a tax-advantaged flexible spending account (FSA) that allows account holders to pay for eligible dental and vision expenses. This plan is funded using pre-tax contributions and can be used in conjunction with a health savings account (HSA). The LPFSA is more restrictive than a standard FSA because the arrangement is reserved for the payment of dental and vision expenses—not other medical costs.
- 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 accessible to individuals whose employers make them available. Self-employed, unemployed, retired, and employees of a business that does not offer an LPFSA cannot use this type of account. 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.
LPFSA accounts offer tax benefits by allowing participants to contribute pretax dollars. This reduces their taxable income and, therefore, their 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.
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. 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, 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 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 or 26 weeks) from each paycheck.
The entire benefit is accessible even if not all payments are satisfied. If the employee requires surgery at the beginning of the year but contributes only once to the account, the full amount of $2,850 is available for their use.
Some employers may place lower contribution limits on their accounts and employees cannot invest in both FSAs and LPFSAs at the same time.
Using an LPFSA
LPFSA funds 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.
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:
- Up to $570 may be carried over from 2022 to 2023 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 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. Health FSAs and dependent care programs are sponsored by employers under 'cafeteria plans.' Due to the Covid-related pandemic, there have been adjustments to the rule for 2021 and 2022. Under the Taxpayer Certainty and Disaster Relief Act of 2020, employers now have the option to amend their cafeteria plans, allowing greater flexibility to employees to use these plans and not forfeit the amounts they have set aside.
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 also increased to $570 from $550.
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.