Limited Purpose FSA

What Is Limited Purpose FSA?

A Limited Purpose Flexible Spending Account (LPFSA) is a type of Flexible Spending Account (FSA) that only allows reimbursements for eligible dental and vision expenses. This is primarily designed for individuals who also have a Health Savings Account (HSA) and allows these individuals to pay for certain eligible health care costs not covered by their HSA, such as dental and vision care. Despite its seemingly restrictive nature, an LPFSA provides additional tax benefit by reducing taxable income, and it helps manage out-of-pocket costs related to dental and vision health.

What Is the History of Limited Purpose FSA?

The Limited Purpose Flexible Spending Account (LPFSA) is a product of the evolution of the healthcare system in the United States. The history of LPFSA is somewhat tied to that of the Health Savings Account (HSA) and Flexible Spending Account (FSA).

FSA, which came before both the HSA and the concept of "limited purpose", was introduced in the 1970s as a part of the plan of a Cafeteria, which is one way for businesses to allow their employees to choose between different types of benefits that best fit their needs. The tax-advantaged benefits of FSAs were introduced in 1978 as part of the Revenue Act.

HSAs were introduced later in 2003 as part of the Medicare Prescription Drug, Improvement, and Modernization Act. To gain the benefits of both a high-deductible health plan in combination with a savings account, and FSA, the concept of Limited Purpose FSA was introduced. It allowed individuals to contribute to both an HSA and FSA at the same time, without the conflict of “double-dipping” tax benefits.

Thus, the Limited Purpose FSA was born out of a need for a healthcare spending account that could coexist with an HSA and cover services like dental and vision, not typically covered by high-deductible health plans. Since its inception, the LPFSA has continued to exist as a valuable asset for many individuals looking to reduce their healthcare costs.

How Do You Calculate Limited Purpose FSA?

The amount of money you contribute to a Limited Purpose FSA (LPFSA) is solely dependent on your personal estimation of out-of-pocket expenses for eligible dental and vision care within the year. It's essential to calculate carefully because the IRS dictates the use-it-or-lose-it rule, which means funds not used by the end of the year (or grace period if your plan provides one) will be forfeited.

To calculate, follow these steps:

1. Review Past Expenditures: Check your previous year's expenses related to vision and dental care. This gives a good baseline for what you might spend in the current year.

2. Estimate Expected Expenses: Do you anticipate any significant vision or dental expenses in the coming year (e.g., orthodontics, eye surgery etc.)? If so, factor these into your overall estimation.

3. Factor in Your Tax Bracket: Remember, LPFSA contributions are made pre-tax, so consider your tax bracket. The higher your tax bracket, the more you save in taxes through your LPFSA contribution.

4. Use IRS Contribution Limit: For 2021, the IRS has set the limit to $2,750 on contributions to a healthcare FSA. You can't exceed that, and your calculation should be within this limit.

5. Plan Conservatively: Since FSA is subject to the use-it-or-lose-it rule, aim for a slight underestimate rather than overestimate.

Remember that these are estimations, and it's impossible to predict all health expenses with 100% accuracy. It's always best to reassess throughout the year and adjust your contributions as necessary during your employer's open enrollment period.

What Are Some Examples of Limited Purpose FSA?

A Limited Purpose FSA (LPFSA) is primarily used for qualifying dental and vision expenses. Here are some examples:

• Routine dental examinations, cleanings, fillings, braces
• Dentures
• Crowns or caps
• Periodontal services and treatments
• Routine vision exams, eyeglasses (frames, lenses), contact lenses
• Eye surgeries, such as LASIK
• Prescription sunglasses
• Vision correction surgery

Remember, all these expenses should be medically necessary and not for cosmetic purposes for them to qualify under LPFSA. As with any FSA, you'd submit claims against these expenses for reimbursement from your LPFSA funds. Always clearly maintain all relevant receipts and documentation for medical expenses to support your claims.

What's the Difference Between Limited Purpose FSA and Health Savings Account (HSA)?

While both a Limited Purpose FSA (LPFSA) and a Health Savings Account (HSA) offer tax advantages, they serve different purposes and have different rules:

Limited Purpose FSA:

1. LPFSA is primarily used for eligible dental and vision care expenses.
2. Contributions are use-it-or-lose-it, meaning unused funds at the end of the year (or at end of the grace period if applicable) are forfeited.
3. An employer may offer LPFSA in conjunction with a high-deductible health plan (HDHP) and HSA.
4. You must use the funds in the account to pay for eligible expenses incurred within the plan year.
5. The IRS maximum contribution limit for 2021 is $2,750.

Health Savings Account:

1. HSA funds can be used for a wide range of qualified medical expenses, not just dental and vision.
2. Unlike LPFSA, HSA funds roll over from year to year. There's no use-it-or-lose-it rule.
3. HSA is available to those enrolled in a high-deductible health plan (HDHP); you don’t need to be part of a specific employer group.
4. Not only can HSA funds be used for current healthcare costs, but they can also be invested and grow over time to be used for future healthcare costs.
5. The IRS maximum contribution limit for an HSA in 2021 is $3,600 for individuals and $7,200 for families.

In essence, both accounts offer tax advantages but differ in terms of usage, rollover rules, and contribution limits. One advantage of an LPFSA is that it allows a participant to have an FSA and an HSA at the same time, increasing their potential tax savings.

What Distinguishes a Limited Purpose Flexible Spending Account From a Dependent Care FSA?

A Limited Purpose Flexible Spending Account (LPFSA) and a Dependent Care FSA are both types of tax-advantaged accounts that allow individuals to set aside pre-tax dollars for eligible expenses. However, they are designed to cover different types of expenses.

Limited Purpose Flexible Spending Account (LPFSA): - Used to pay for eligible dental and vision care expenses only. - Paired with a high-deductible health plan (HDHP) and often used in conjunction with a Health Savings Account (HSA). - The IRS maximum contribution limit is $2,750 for 2021. - Limited carryover options: unused funds might be forfeited at the end of the plan year, depending on the employer’s plan rules.

Dependent Care FSA: - Used to pay for qualifying child or elder care expenses, such as daycare, preschool, and before and after school care programs. - It can also cover adult daycare for physically or mentally impaired adults. - The IRS maximum contribution limit for a Dependent Care FSA is $5,000 per year (or $2,500 for married individuals filing separately) for 2021. - Generally, there's no carryover for unused funds at the end of the plan year; funds are "use-it-or-lose-it" and get forfeited if not used.

In short, an LPFSA is best for individuals who have a HDHP and want extra tax benefits related to dental and vision expenses, while a Dependent Care FSA is designed for those who need to pay for dependent care expenses while they work, look for work, or attend school.

What Are Some Examples of Dependent Care FSA?

A Dependent Care FSA (Flexible Spending Account) covers a variety of eligible expenses related to care for a dependent. Here are some examples:

• Preschool or nursery school fees
• Before-school and after-school care programs
• Day care or child care fees
• Summer day camps
• Babysitter expenses inside your home (the babysitter cannot be a child under 19 years old or the dependent's parent)
• Adult daycare programs for aging parents who live with you and are incapable of self-care

Remember, the expenses must allow you (and your spouse if filing jointly) to work, look for work, or attend school full-time. Each expense should be justified with receipts and relevant documentation. Also, overnight camp expenses and care for children 13 and older are generally not eligible. Always check your specific plan documentation to confirm what is covered.

What Are the Predictors of Limited Purpose FSA?

The predictors of a Limited Purpose FSA (LPFSA) generally refer to the factors or circumstances that may indicate or influence an individual's decision to utilize this type of account. They may include:

1. Enrollment in a High Deductible Health Plan (HDHP): You can only set up an LPFSA if you're already enrolled in an HDHP and have a Health Savings Account (HSA).

2. Anticipated Dental and Vision Expenses: If you expect to have significant dental or vision expenses in a given year (for example, if you plan to get orthodontics or eye surgery), contributing to an LPFSA could provide valuable tax advantages.

3. Higher Income Brackets: Since LPFSAs provide a tax advantage by allowing pre-tax contributions, individuals in higher income tax brackets may see a greater tax benefit and may be more likely to establish an LPFSA.

4. Employer Offering: Not all employers offer LPFSAs. The availability of an LPFSA through an employer's benefits package is a major predictor of whether an individual can even consider this type of account.

5. Risk Tolerance: Since LPFSA operates on a use-it-or-lose-it principle, individuals who are comfortable estimating their medical expenses and are willing to risk potentially losing unused funds might be more inclined to utilize an LPFSA.

Remember, individual situations vary, and these predictors don't guarantee whether an LPFSA is the right choice for everyone. It's important to assess your individual health care needs, financial situation, and tax implications before deciding to contribute to an LPFSA.

What Are the Benefits of Limited Purpose FSA?

A Limited Purpose FSA (LPFSA) provides a number of benefits, including:

1. Tax Savings: Contributions to an LPFSA are made pre-tax, reducing your taxable income and increasing your take-home pay.

2. Dental and Vision Expense Coverage: An LPFSA is designed to cover out-of-pocket costs for eligible dental and vision care, helping you manage these often significant expenses.

3. Complements Health Savings Account (HSA): Since an LPFSA is compatible with an HSA, you can reap the tax benefits of both types of accounts – the LPFSA for dental and vision care, and the HSA for other medical expenses.

4. Immediate Availability of Funds: Typically, the total amount you decide to contribute to your LPFSA for the year is available for use at the start of the plan year, regardless of how much you've contributed so far.

5. Flexibility: You can decide how much to contribute to your LPFSA, within IRS and employer-set limits. Furthermore, you can change your contribution amount during your employer's open enrollment period or if you have a qualifying life event.

6. Ease of Use: Many LPFSAs come with a debit card for easy payment at the point of service, and the claims process is straightforward.

Remember, it's important to estimate your potential dental and vision expenses accurately, because any funds left unspent in your LPFSA at the end of the year (or grace period, if provided) will be forfeited due to the use-it-or-lose-it rule.

What Are the Potential Disadvantages or Drawbacks of a Limited Purpose FSA?

Despite the numerous benefits, there are a few potential drawbacks to consider with a Limited Purpose FSA (LPFSA):

1. Use-It-or-Lose-It Rule: If you don't use all of the money in your LPFSA by the end of your plan year (or grace period, if applicable), you forfeit those funds. This makes it essential to accurately estimate your expected dental and vision expenses for the year.

2. Limited Eligible Expenses: LPFSAs are limited to specific vision and dental care expenses, so if you don't anticipate having a lot of these expenses, an LPFSA may not be beneficial for you.

3. Job Changes: If you change jobs, you can't take your LPFSA with you. Any contributions made by your employer are lost unless you elect COBRA continuation and continue the contributions.

4. Upfront Funding: While it's a benefit that your entire annual election is available at the beginning of the plan year, if you spend those funds and then leave your job before the end of the year, you might be responsible for the difference between what you spent and what you actually contributed.

5. Requires High-Deductible Health Plan (HDHP): You can only open an LPFSA if you're enrolled in an HDHP and have a Health Savings Account (HSA).

As with any financial decision, you should carefully consider these potential disadvantages in the context of your personal financial and health situation before deciding to open an LPFSA.

How Can You Compensate for Limited Purpose FSA?

Compensating for a Limited Purpose FSA (LPFSA) suggests finding alternatives or creating a safety net if you don't have access to this type of account or if you feel it is not meeting your needs. Here are a few strategies:

1. Health Savings Account (HSA): If you have a High Deductible Health Plan, consider using an HSA. It offers similar tax advantages and can be used for a broader range of medical expenses. Unlike an LPFSA, funds in an HSA roll over year after year.

2. Standard Health FSA: If you aren't enrolled in an HDHP, a standard health FSA could be an option. This type of account can be used for a wide range of out-of-pocket medical expenses.

3. Savings and Budgeting: Set aside money in a regular savings account for anticipated healthcare costs. This approach lacks the tax advantages of an FSA, but there's no risk of losing unused funds.

4. Insurance Coverage: Review your insurance plans. Make sure your health insurance covers as many of your anticipated medical costs as possible.

5. Preventive Care: Regular preventive care can potentially reduce the need for costly procedures. These services are often fully covered by insurance plans under the Affordable Care Act.

6. Health Reimbursement Arrangement (HRA): Some employers offer HRAs, which are funded by the employer to reimburse the employee for eligible healthcare expenses.

7. Use of Credit: Some people choose to use credit cards to pay for health care expenses. While this does provide a means to pay, keep in mind potential interest charges if the balance is not paid in full each month.

Always evaluate these options based on your personal financial situation and healthcare needs. Consult with a financial advisor or benefits coordinator for personalized advice.