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You may be familiar with flexible spending accounts (FSAs) — employer-sponsored accounts that can help you save money on healthcare expenses. But did you know an employer can offer different types of FSAs?
In addition to traditional FSAs — also referred to as healthcare FSAs — there are dependent care FSAs (DC-FSAs) and limited purpose FSAs (LP-FSAs). Dependent care FSAs are intended for participants with dependents. Limited-purpose FSAs, which can be used for dental and vision expenses, are available to employees enrolled in a high-deductible health plan (HDHP) with a health savings account (HSA).
Learn more about LP-FSAs, including who’s eligible, what’s covered, and how to use one.
A limited purpose FSA is a tax-advantaged savings account that lets you set aside pre-tax money to pay for eligible dental and vision expenses. LP-FSAs can cover individuals, spouses, and eligible dependents.
Unlike a traditional FSA — which can help pay for a variety of medical costs, including dental and vision — an LP-FSA is intended for just dental and vision care expenses. In some cases, you can use an LP-FSA to pay for post-deductible medical expenses.1 This means once you’ve met your healthcare plan deductible, you may be able to use your LP-FSA to pay for qualified medical expenses.
An LP-FSA has the same contribution limits as a traditional FSA. For 2023, the contribution limit for an LP-FSA is $3,050, with a maximum of $5,000 per household or $2,500 for married couples filing separately.2 And just like a traditional FSA, the money you elect to contribute will be deducted from your paycheck tax-free. To figure out how much to contribute, consider what you can afford to have deducted from your paycheck and how much you anticipate having in covered expenses for the year.
Any unused funds in an LP-FSA may be forfeited at the end of the year. Check with your employer to see if they offer a 2.5-month grace period or allow you to roll over unused funds up to a certain amount. In 2023, the maximum rollover amount is $610.4
To be eligible for an LP-FSA, you must be enrolled in an HDHP and have an HSA.
Self-employed and retired individuals aren’t eligible for an LP-FSA, or any type of FSA, because these accounts are restricted to full-time employees at a company that offers health insurance. However, these individuals can open an individual HSA — as long as they have an HDHP.
LP-FSAs can be used to cover the costs of qualified dental and vision expenses.
Here are some examples of out-of-pocket expenses you can use an FSA for:
For a complete list of eligible expenses, review Internal Revenue Service (IRS) Publication 502.5
You must be enrolled in an HDHP and contribute to an HSA in order to have an LP-FSA, but the choice to use both is up to you. Electing to use both accounts in tandem can help save you money each year.
For example, by using your LP-FSA funds to pay for short-term dental and vision expenses — like exams and one-time procedures — you can save your HSA money for future medical costs and maximize your potential for tax-free growth. Ultimately, an LP-FSA is a great way to help you save on more routine dental and vision services — because you typically need to use the money by the end of the plan year. In contrast, the money in your HSA stays with you and may be most beneficial when used to invest for the long term.
With that in mind, it’s important to understand that funds from an LP-FSA and HSA can’t be used to pay for the same eligible expense., otherwise known as “double-dipping”.6 You can’t get reimbursed twice for the same expense — you must decide which account you want to use for reimbursement.
Enrolling in an LP-FSA can be an excellent option for those looking to reduce their dental and vision expenses while capitalizing on potential tax savings. If you’re already contributing to an HSA, starting an LP-FSA is a good way to maintain flexible HSA advantages without losing out on the benefits of an FSA.
Nothing in these materials is intended to be, nor should be construed as, advice or a recommendation for a particular situation or individual. Participants should consult with their own advisors for such advice. Federal and state laws and regulations are subject to change.
2 “2023 FSA and Commuter Limits” Employee Benefits Corporation, 2023
3 “Notice 2021-15” IRS, 2021
4 “IRS provides tax inflation adjustments for tax year 2023” IRS, 2022
5 “IRS Publication 502” IRS, 2022
6 “Flex-Ed: Think before you "double dip" with your FSA!” FSA Store, 2023