What Is an LPFSA and How Does It Work?

Limited Purpose Flexible Spending Accounts (LPFSAs) offer a tax-advantaged way for individuals to manage out-of-pocket healthcare expenses, specifically for dental and vision costs. By allowing pre-tax contributions, these accounts reduce taxable income while covering qualified medical expenses.

Enrollment Requirements

Enrolling in an LPFSA requires understanding eligibility and timing. Typically offered through an employer’s benefits package, employees must enroll during the open enrollment period, usually in the fall. Missing this period means waiting until the next cycle unless a qualifying life event, such as marriage or childbirth, occurs.

Eligibility is generally tied to participation in a high-deductible health plan (HDHP) compatible with a Health Savings Account (HSA). This ensures the LPFSA complements an HSA, maximizing tax-advantaged savings for healthcare expenses. Employers may have additional requirements, such as minimum employment duration or full-time status.

Employees also need to decide their annual contribution amount, which determines available funds for eligible expenses. Estimating expected dental and vision costs is important to avoid over- or under-contributing, as unused funds may be forfeited unless the employer offers rollovers or grace periods.

Contribution Limits

For 2024, the IRS has set the maximum LPFSA contribution limit at $3,050. This cap influences how much can be allocated for dental and vision expenses and plays a role in tax planning, as contributions reduce taxable income.

Employees must balance the need to cover anticipated expenses with the risk of losing unused funds. Forecasting dental and vision costs, such as major procedures or new prescription glasses, helps determine an appropriate contribution amount. Those expecting minimal expenses may opt for a more conservative approach.

Qualifying Expenses

LPFSAs cover specific out-of-pocket healthcare expenses, focusing on dental and vision services. Understanding eligible expenses ensures effective use and IRS compliance.

Dental Procedures

Dental expenses eligible for LPFSA reimbursement include preventive care like cleanings and exams, as well as restorative work such as fillings, crowns, and bridges. More extensive treatments, like root canals and periodontal services, also qualify. However, cosmetic procedures like teeth whitening are excluded. Estimating these costs can help employees optimize their contributions.

Vision Services

Vision-related expenses covered by LPFSAs include eye exams, prescription eyeglasses, contact lenses, and corrective surgeries like LASIK. Costs for these services can vary widely, making it important to plan contributions based on individual needs. For example, an eye exam can range from $50 to $250, while glasses or contact lenses can cost hundreds annually.

Orthodontic Treatments

Orthodontic treatments, including braces and retainers, are eligible if deemed medically necessary. Costs typically range from $3,000 to $7,000, depending on complexity and duration. Many orthodontists offer installment plans, allowing employees to align LPFSA contributions with payment schedules to ensure funds are available when needed.

Deadlines for Claim Submissions

Claim submission deadlines are essential for effective LPFSA use. Employers, guided by IRS regulations, set deadlines for submitting eligible expenses. Many plans offer grace periods or carryover options to extend the use of funds beyond the calendar year. Grace periods may allow an additional 2.5 months to incur and claim expenses, while carryover provisions permit rolling over up to $610 of unused funds into the next year.

Tracking expenses and understanding plan-specific terms can prevent forfeiture of unused funds. Regularly reviewing account balances and maintaining accurate records helps ensure claims are submitted on time.

Payroll Deductions

LPFSAs are funded through payroll deductions, allowing employees to contribute pre-tax dollars directly from their paychecks. This reduces taxable income and provides immediate tax benefits, as contributions are exempt from federal income tax, Social Security tax, and often state income tax.

Employees specify their annual contribution amount during enrollment, which is evenly divided across pay periods. For instance, a $2,400 annual contribution would result in $92.31 deducted from each biweekly paycheck. Contributions are irrevocable unless a qualifying life event occurs, permitting mid-year adjustments.

Employers must comply with IRS regulations and ensure timely remittance of deducted funds. Employees should review pay stubs regularly to confirm accurate deductions and avoid disruptions in account access.

Coordination with Health Plans

LPFSAs complement high-deductible health plans (HDHPs) and Health Savings Accounts (HSAs), offering a coordinated approach to managing healthcare expenses. Unlike general-purpose FSAs, LPFSAs are specifically designed for dental and vision expenses, ensuring they do not overlap with broader HSA coverage.

This coordination allows employees to use HSA funds for long-term savings or major medical expenses while reserving LPFSA funds for routine dental and vision care. For example, HSA contributions might be used to meet an HDHP deductible, while LPFSA funds cover routine eye exams or dental cleanings. This strategy optimizes the tax advantages of both accounts.

Employers often provide resources, such as educational materials or benefits consultations, to help employees coordinate their LPFSA and HSA effectively. Staying informed about IRS regulations and employer policies ensures employees can fully leverage these accounts for their healthcare and financial goals.