What Is a Limited Purpose FSA and How Does It Work?
Discover how a Limited Purpose FSA can optimize your dental and vision expenses while offering tax benefits and complementing your HSA strategy.
Limited Purpose Flexible Spending Accounts (FSAs) provide a tax-advantaged way for individuals to manage specific healthcare costs like dental and vision care. Unlike general FSAs, these accounts are designed to complement Health Savings Accounts (HSAs), offering targeted benefits for those enrolled in High Deductible Health Plans (HDHPs). Understanding how these accounts work is key to maximizing their advantages.
Eligibility Criteria
To qualify for a Limited Purpose FSA, individuals must typically be enrolled in an HDHP and eligible to contribute to an HSA. These accounts focus on covering out-of-pocket dental and vision expenses, preserving HSA funds for broader medical needs. Employers may impose additional requirements, such as minimum work hours or employment duration. Employees should review their employer’s plan documents to confirm specific eligibility conditions.
The IRS sets annual contribution limits for Limited Purpose FSAs. For 2024, the limit is $3,050, separate from the HSA contribution cap. This separation allows individuals to maximize tax-advantaged savings across both accounts.
Covered Expenses
Limited Purpose FSAs cover dental and vision expenses, providing a tax-efficient way to manage these costs and reserve HSA funds for other medical needs.
Dental Services
Eligible dental expenses usually include preventive care, such as cleanings, fluoride treatments, and X-rays, as well as restorative procedures like fillings, crowns, and bridges. Orthodontic treatments, such as braces, may also qualify, though coverage varies by plan. Consulting employer plan documents is recommended, as the IRS does not provide a comprehensive list of eligible dental expenses. Contributions are deducted pre-tax, lowering taxable income.
Vision Services
Vision expenses eligible for reimbursement often include routine eye exams, prescription glasses, and contact lenses. Corrective procedures like LASIK surgery may also qualify, depending on the plan. However, cosmetic items like non-prescription sunglasses are typically not covered. Contributions reduce gross income, offering tax savings.
Other Approved Categories
Some plans may cover additional categories, such as specific over-the-counter medications or health screenings, if deemed medically necessary. Coverage for these items varies by employer, making it essential to review plan details to fully utilize the account.
Tax Considerations
Contributions to Limited Purpose FSAs are made on a pre-tax basis, reducing taxable income and resulting in significant tax savings. This benefit, governed by IRS regulations, can lower federal income, Social Security, and Medicare taxes. For 2024, employees contribute 6.2% for Social Security and 1.45% for Medicare taxes.
Most states also allow pre-tax contributions, though rules vary. Consulting a tax professional can clarify state-specific tax treatments. Unused funds at year-end may be forfeited unless the employer offers a carryover or grace period.
Enrollment and Contribution Rules
Enrollment typically occurs during an employer’s open enrollment period. Employees must estimate their dental and vision expenses carefully, as unspent funds may be forfeited under the “use-it-or-lose-it” rule. Overestimating contributions can lead to lost funds, while underestimating may result in out-of-pocket costs.
Once enrolled, employees commit to an annual contribution amount, distributed evenly across payroll periods. Mid-year changes are allowed only under specific circumstances, such as a change in employment status or family situation. Employers may offer a grace period of up to 2.5 months or allow a carryover of up to $610 for unused funds.
Reimbursement Procedures
Reimbursement requires submitting claims for eligible expenses with supporting documentation, such as itemized receipts or Explanation of Benefits (EOB) statements. These documents must detail the service provided, the date, and the amount paid.
Employers often work with third-party administrators (TPAs) to process claims through online portals or mobile apps. Approved reimbursements are issued directly to participants. Only expenses incurred during the plan year (or applicable grace period) qualify for reimbursement. Submission deadlines must be met to avoid losing eligible funds.
Coordination with other accounts like HSAs requires careful attention to avoid using funds from the wrong account, which could result in penalties. Organized documentation is key to ensuring compliance.
Interaction with Health Savings Accounts
Limited Purpose FSAs are designed to supplement HSAs, enabling participants to use pre-tax dollars exclusively for dental and vision expenses. This setup helps preserve HSA funds for broader healthcare needs or long-term savings.
In 2024, individuals can contribute up to $4,150 to an HSA ($8,300 for families) while also contributing $3,050 to a Limited Purpose FSA. This dual strategy significantly reduces taxable income while providing greater financial flexibility.
Proper coordination is essential to avoid overlap between accounts. HSA funds are restricted to qualified medical expenses, while Limited Purpose FSA funds must be used for dental and vision costs. Maintaining clear records ensures compliance with IRS regulations and helps participants optimize their healthcare savings strategy.