By now, most people are familiar with Flexible Spending Accounts (FSAs), which allow you to set aside money from your paycheck pre-tax to pay for a wide variety of medical expenses. You may not be familiar, though, with the limited purpose FSA, or LPFSA.
A limited purpose FSA is a healthcare spending account that can only be used for eligible vision and dental expenses. Unlike a healthcare FSA, however, an LPFSA can be held at the same time as a Health Savings Account (HSA). When coordinated with an HSA, the LPFSA can further reduce your taxes while allowing you to allocate HSA funds to other purposes – including retirement.
With an LPFSA, you can set aside money specifically for dental and vision expenses. By eliminating the need to use your HSA funds for these expenses, you have more to spend on regular medical expenses. More important, funding dental and vision expenses from an LPFSA may also allow you to keep more savings in your HSA. Over time, those additional savings can help your retirement nest egg grow larger.
Who Is Eligible for an Limited Purpose FSA
To establish an LPFSA, you must be enrolled in both a high-deductible health plan and an HSA. Under current IRS rules, you cannot deposit money into an HSA if you participate in a standard healthcare FSA. However, because an LPFSA restricts reimbursements to specific dental and vision care expenses, the IRS allows you to participate in both an LPFSA and an HSA at the same time. By having both accounts, you can maximize your tax and savings benefits.
How It Works
An LPFSA works just like a regular FSA, except for the limited number of eligible expenses. You designate a certain amount of money to be taken out of each paycheck and deposited into your LPFSA account. You then use these pre-tax dollars to pay for eligible vision or dental expenses, such as eye exams, new glasses, regular dental checkups, and more. Check with your plan administrator for a full listing of eligible expenses.
As with an FSA, your spouse and dependents are also covered under the plan. In addition, depending on how your LPFSA is structured, you may have the option of carrying over unused money into the next year (current maximum is $500).
Also like a regular FSA, annual contributions to an LPFSA cannot exceed $2,600. It pays to keep close tabs on your account balance at all times; with some administrators, any claims submitted after you exhaust your LPFSA funds during a plan year may automatically be reimbursed from your HSA. Check with your administrator to confirm how excess LPFSA claims are handled under your plan.
No “Double-Dipping” Allowed
The IRS frowns upon double-dipping. So it’s important to understand that you cannot use funds from both your LPFSA and HSA to cover the same eligible expense, even if the expense is considered eligible under both plans. Instead, you must decide which account will reimburse your expense.
Also, because LPFSA funds are pre-tax, you can’t deduct the reimbursed expenses at tax time. To avoid mistakes, keep in mind that the IRS counts eligible expenses from the day you received the service, not the day you were billed or paid for it. For example, if you have a dental cleaning on December 28, 2016 but didn’t pay for it until January 2017, the expense would count for 2016.
An LPFSA offers a tax-friendly tool for paying dental and vision expenses while potentially adding to your HSA savings. If your employer offers this type of plan, signing up for it can enhance your current cash flow while contributing to your long-term financial security.