Does a Limited Purpose FSA Rollover?

A Limited Purpose Flexible Spending Account (LPFSA) is a tax-advantaged financial tool designed to help individuals pay for specific healthcare expenses. This account is typically offered alongside a Health Savings Account (HSA), allowing participants to cover out-of-pocket costs while preserving HSA funds. This article clarifies the rules governing LPFSA funds, addressing whether they can be rolled over from one plan year to the next.

The “Use It or Lose It” Principle

Flexible Spending Accounts, including Limited Purpose FSAs, are subject to the “use it or lose it” rule. This principle dictates that funds contributed to an FSA must be used for eligible expenses within the designated plan year. If a participant does not spend all the money in their account by the end of the plan year, the remaining balance is forfeited to the employer. This encourages participants to estimate their anticipated dental, vision, and preventive care expenses for the upcoming year.

Exceptions to the Principle: Carryover and Grace Period

While the “use it or lose it” rule is a defining characteristic of FSAs, the IRS provides two exceptions that offer some flexibility for unused funds: the carryover provision and the grace period. These options are determined by the employer and are not universally available. An employer can choose to offer one of these exceptions or neither, but they cannot offer both simultaneously.

The carryover provision allows participants to transfer a limited amount of unused FSA funds from one plan year into the next. For the 2024 plan year, the maximum amount that can be carried over is $640. This amount can be used for eligible expenses incurred in the new plan year, providing a buffer against unexpected medical costs or miscalculated estimations. The employer has discretion to implement this option and may even set a lower carryover limit.

Alternatively, an employer may implement a grace period, which provides participants with an extended timeframe to incur eligible expenses after the official end of the plan year. This period can last for up to two and a half months following the plan year’s conclusion. For example, if a plan year ends on December 31, a grace period would extend until March 15 of the following year.

Limited Purpose FSA Specifics and Distinctions

Limited Purpose FSAs are designed to cover eligible dental, vision, and certain preventive care expenses. Their design allows individuals enrolled in a high-deductible health plan (HDHP) with a Health Savings Account (HSA) to participate in an LPFSA without compromising their HSA eligibility. This allows participants to pay for current dental and vision needs with pre-tax dollars through the LPFSA, while saving their HSA funds for future use.

The rules concerning the “use it or lose it” principle, as well as the carryover and grace period exceptions, apply to Limited Purpose FSAs in the same manner as general purpose health FSAs. This means that any unused funds in an LPFSA at the end of the plan year will be forfeited unless the employer’s plan includes a carryover or grace period provision. The maximum carryover amount of $640 for 2024 also applies to LPFSA funds.

The availability of a carryover or grace period for an LPFSA is solely at the employer’s discretion. Plan participants should consult their specific plan documents to understand which, if any, of these exceptions are offered for their Limited Purpose FSA.