What Is a Limited Purpose Flexible Spending Account?

A Limited Purpose Flexible Spending Account (LP-FSA) is a tax-advantaged savings account for specific healthcare costs. It allows participants to set aside pre-tax money from their paycheck to cover eligible dental and vision expenses. It provides tax savings, reducing out-of-pocket costs for these services.

It complements a Health Savings Account (HSA) by funding routine dental and vision care without affecting HSA eligibility.

Understanding the Limited Purpose FSA

A Limited Purpose Flexible Spending Account (LP-FSA) is a distinct type of healthcare savings account that differs from a general-purpose Flexible Spending Account (FSA) primarily in the scope of expenses it covers. An LP-FSA is restricted to specific dental and vision care expenses. This limitation is key to its design and compatibility with other tax-advantaged health accounts.

LP-FSAs are typically offered to individuals enrolled in a High-Deductible Health Plan (HDHP) who also have a Health Savings Account (HSA). Internal Revenue Service (IRS) rules prohibit contributing to both an HSA and a general-purpose FSA simultaneously, as a general FSA disqualifies HSA eligibility. However, an LP-FSA is limited to dental and vision expenses, it does not interfere with HSA eligibility, allowing participants to use both accounts.

This arrangement allows individuals to use the LP-FSA for routine dental and vision costs with pre-tax dollars, preserving their HSA funds for other medical expenses or long-term savings. Eligible individuals are employees whose employers offer this benefit. Self-employed individuals are not eligible for any type of FSA, as these accounts are employer-sponsored.

Qualified Medical Expenses

The “limited purpose” aspect of an LP-FSA means that only specific types of healthcare expenses are eligible for reimbursement. These accounts are primarily designed to cover dental and vision care costs. The IRS defines what constitutes a qualified medical expense, and these definitions apply to LP-FSAs.

For dental expenses, an LP-FSA can be used for a wide range of services, including:
Routine preventative care such as cleanings, check-ups, and X-rays.
More involved procedures like fillings, crowns, bridges, extractions, and dentures.
Orthodontic treatments, including braces and retainers.

Regarding vision expenses, LP-FSAs cover costs associated with maintaining or correcting eyesight, including:
Eye exams.
Prescription eyeglasses and contact lenses, along with their associated solutions.
Prescription sunglasses.
Vision correction surgery, such as LASIK.

General medical expenses such as doctor visits, prescription medications, or hospital stays are not covered by an LP-FSA; these are intended to be paid for by an HSA once a high deductible is met.

Managing Your Limited Purpose FSA

Contributions to a Limited Purpose FSA are made through pre-tax payroll deductions, which means the money is taken from your paycheck before federal income taxes, Social Security tax, and Medicare tax are withheld. This reduces your taxable income, leading to immediate tax savings. The Internal Revenue Service (IRS) sets annual contribution limits for FSAs, including LP-FSAs, which can change each year. For 2025, the maximum amount an individual can contribute to an FSA, including an LP-FSA, is $3,300. If both spouses are eligible and participate through their respective employers, they can each contribute up to the annual maximum to their own plans.

Submitting claims for reimbursement typically involves providing documentation, such as itemized receipts or an Explanation of Benefits (EOB) from your dental or vision plan, to your plan administrator. Many plans also provide a debit card, often referred to as a flex card, that can be used directly at the point of sale for eligible expenses, simplifying the payment process. It is crucial to retain all detailed records and receipts, as they may be required for substantiation of expenses or in case of an IRS audit.

A significant rule governing FSAs, including LP-FSAs, is the “use it or lose it” rule, which generally requires that funds be used by the end of the plan year or they are forfeited. However, employers may offer one of two exceptions to this rule: a grace period or a limited carryover amount.
A grace period allows an additional 2.5 months after the plan year ends to incur and use remaining funds.
Alternatively, some plans permit a limited carryover of unused funds into the next plan year. For 2025, the maximum amount that can be carried over is $660, though employers can choose to allow a lower amount or no carryover at all.
Employers are typically not permitted to offer both a grace period and a carryover option.