Key Takeaways

  • A limited purpose FSA (LPFSA) is a tax-advantaged account used only for dental and vision expenses.
  • LPFSAs can be paired with HSAs without disqualifying HSA eligibility.
  • Contributions are pre-tax, reducing taxable income and increasing take-home pay.
  • LPFSAs may include features like carryovers, grace periods, and run-out periods.
  • Contribution limits, eligible expenses, and usage rules vary by year and employer.

Limited Purpose FSA: Everything You Need to Know

A limited-purpose FSA (flexible spending account) is similar to a general purpose FSA, except that qualified medical expenses are limited to eligible dental and vision costs for the employee, employee’s spouse, and any eligible dependents. With an FSA, money is earmarked from the paycheck before accounting for taxes. This money can be used for pre-tax FSA dollars to spend on qualified vision or dental costs throughout the life of the plan. Examples of qualified costs include dental exams, eye appointments, glasses, and many more.

The limited portion of the FSA allows the employee or employee’s spouse to participate in both the FSA and a health savings account (HSA). This benefit allows both to maximize the amount of savings and tax benefits. In addition, depending on the type of FSA plan chosen, the employee can carry over five hundred dollars of unused funds to the subsequent year.

How a Limited Purpose FSA Works with an HSA

A limited purpose FSA is specifically designed to complement a Health Savings Account (HSA). Unlike a general-purpose FSA, an LPFSA does not disqualify you from HSA participation because it restricts reimbursements to dental and vision expenses. This setup allows you to preserve your HSA for long-term savings or broader qualified medical costs while using your LPFSA for immediate dental and vision needs.

This dual-account approach can maximize tax savings, especially for individuals and families with consistent eye or dental care needs. By using an LPFSA for routine vision and dental expenses, your HSA funds can remain untouched and grow through interest or investment.

HSA Eligibility

An HSA is both a health care account as well as a savings account. An HSA offsets the expenses of a high deductible plan and provides savings for any out of pocket (OOP) health care costs that the employee, employee’s spouse, or eligible dependents currently have or may have in the future.

Before an employee can open an HSA account, he or she must:

  • Be covered under a High Deductible Health Plan (HDHP)
  • Be covered only under an HDHP, even if enrolled in another plan
  • Not be enrolled in Medicare
  • Not be claimed as a dependent on someone else’s tax return

2022 Contribution Limits and Carryover Rules

For the 2022 plan year, the IRS allowed LPFSA contributions up to $2,850 per individual. Employers may offer a carryover provision that lets unused funds roll into the next year, typically capped at $570 (indexed annually). Alternatively, some plans may allow a 2.5-month grace period after the plan year ends, but not both.

Employees should review their Summary Plan Description (SPD) to confirm whether their plan includes a carryover or grace period and the specific thresholds. Planning contributions carefully is essential, as unused funds may be forfeited if not used within the permitted period.

Eligible Expenses

Qualified medical expenses are typically included in the employee plan packet provided by the employer. With a limited-purpose FSA, any reimbursable expenses under the FSA cannot also be reimbursable expenses under the HSA.

What Can You Use a Limited Purpose FSA For?

Eligible expenses under a limited purpose FSA are strictly limited to dental and vision care. These include:

  • Vision exams, contact lenses, and eyeglasses (including readers and prescription sunglasses)
  • Dental cleanings, X-rays, fillings, crowns, and orthodontics
  • LASIK surgery and other vision correction procedures
  • Denture fittings and dental sealants

Note: Expenses for general medical services, prescriptions, and over-the-counter medications are not covered unless related to dental or vision treatment.

Limited-Purpose FSA: Additional Features

The employee's entire health FSA election is available on the first day of the plan year. If the FSA is active, the available funds decrease as the claims are paid. Also, the employer chooses the reimbursement schedule. The employer also can decide the features included in the FSA plan, and the way it is set up determines if the employee can carry over any unused funds to the subsequent year.

The employee must review the summary description of the FSA plan to figure out whether it includes a carryover feature or a grace period extension. A carryover plan allows the employee to carry over any unused funds from one year into the next year. The amount allowed is typically $500, although the amount will vary depending on the specific plan. If the plan allows for a grace period, the employee will have a certain extension of time to use the funds remaining in the FSA before they go away. The grace period usually lasts a little over two months. The IRS does not allow an FSA to have both a carryover and a grace period feature.

An FSA also has what’s called a “run-out period.” A run-out period is a set amount of time after the end of the plan where the employee can submit claims for qualified medical expenses incurred during the past year. However, not all FSA plans have this feature, and the time period for this feature can vary depending on the plan. After the run-out period ends, the IRS has mandated that all of the unused funds left in the account after the grace period or run-out period are forfeited.

The forfeited money will be gone forever. It cannot be paid back to the account holder and cannot be transferred between any other accounts. Thus, it is beneficial to the account holder to accurately account for the amount of health care costs he or she estimates will be spent during the plan year. In order to minimize the risk of losing money, the account holder should choose a plan amount that closely resembles the estimate. This chosen amount cannot be altered during the year unless the account holder undergoes a change in status or another event that is deemed qualified under the rules of the IRS. If the employee meets that status or qualified event, the FSA plan must also allow the change.

If an employee ceases to be employed for the employer or becomes ineligible for the FSA plan, the pre-tax contributions and participation in the plan will automatically cease, as well. Any costs for health care that the employee incurs after the plan’s end will not be reimbursable expenses.

Enrollment and Mid-Year Changes

Employees typically enroll in a limited purpose FSA during open enrollment or within 30 days of a qualifying life event (e.g., marriage, birth of a child). After enrollment, changes to contributions are generally not allowed unless a qualifying status change occurs.

To make mid-year adjustments, employees must notify HR and provide documentation of the qualifying event. The plan must also permit such changes, as determined by the employer and IRS guidelines.

Tax Advantages of an LPFSA

A major benefit of a limited purpose FSA is its triple tax advantage:

  1. Pre-tax Contributions – Contributions are made from your paycheck before taxes, lowering your taxable income.
  2. Tax-Free Reimbursements – Withdrawals used for qualified dental and vision expenses are tax-free.
  3. FICA Savings – Contributions are not subject to Social Security and Medicare payroll taxes.

For 2022, participating in both an HSA and an LPFSA enabled higher cumulative tax savings compared to using just one account. Employers may also contribute to your LPFSA, adding further value without reducing your contribution limit.

Frequently Asked Questions

1. What is the main benefit of a limited purpose FSA in 2022? It allows pre-tax savings on dental and vision expenses while maintaining HSA eligibility.

2. Can I use LPFSA funds for prescription medications? No. LPFSA funds can only be used for vision and dental expenses, not general medical or pharmacy costs.

3. How much could I contribute to an LPFSA in 2022? The IRS limit was $2,850 for the 2022 plan year.

4. What happens to unused LPFSA funds at year-end? Unused funds may be carried over (if allowed by your plan, typically up to $570) or used during a 2.5-month grace period. Otherwise, they’re forfeited.

5. Can my employer contribute to my LPFSA? Yes. Employers can contribute to your LPFSA without affecting your annual contribution limit.

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