How to Use a Limited Purpose FSA (LPFSA)

What Is a Restricted Objective Versatile Spending Account (LPFSA)?

A restricted function versatile spending account (LPFSA) is a particular sort of versatile spending account (FSA) that could be out there to customers enrolled in a well being financial savings account (HSA). An HSA is a sort of financial savings account that lets customers put aside cash on a pre-tax foundation to pay for certified medical bills. Shoppers are sometimes given the choice to enroll in LPFSAs and HSAs via their employers (employers act as sponsors for some of these financial savings accounts).

Usually, the Inner Income Service (IRS) means that you can have both an HSA or an FSA—however not each. Nevertheless, you may have an HSA and an LPFSA in case your employer permits it.

Shoppers can use LPFSAs to pay for imaginative and prescient and dental bills earlier than they’ve met their insurance coverage deductible. In some instances, an LPFSA may also be used for normal certified medical bills after you meet your deductible. Nevertheless, this is dependent upon the principles your employer has established for the LPFSA account that’s supplied.

Sometimes, customers which have an HSA usually are not eligible to open an everyday FSA. An everyday FSA is totally different than an LPFSA. An everyday FSA permits you to use pretax {dollars} to pay for certified medical bills, together with dental and imaginative and prescient bills. An LPFSA permits you to use pretax {dollars} to pay for certified dental and imaginative and prescient bills, comparable to dental cleanings, fillings, imaginative and prescient exams, contact lenses, lens answer/cleaner, and prescription glasses.

An LPFSA additionally permits you to use pretax {dollars} to pay for preventive care bills that your well being plan doesn’t cowl. You may solely use an LPFSA to pay for some other certified medical bills (past dental and imaginative and prescient care prices) after you meet your medical health insurance deductible, and provided that your employer has arrange its plan to permit this use of LPFSA funds.

As well as, LPFSAs, like FSAs, are solely out there to you in case your employer affords them; you may’t open an account by yourself. Underneath federal legislation, each even have an annual contribution restrict of $2,750 for 2021, rising to $2,850 in 2022. The quantity is normally elevated annually to account for inflation.

Restricted Objective Versatile Financial savings Account (LPFSA) vs. Well being Financial savings Account (HSA)

Similar to an LPFSA, an HSA has the benefit of letting you contribute pretax {dollars}, so it’s a great way to make your out-of-pocket medical bills extra reasonably priced. Nevertheless, HSAs are broader—they cowl a wide range of medical bills, together with dental and imaginative and prescient. In distinction, you may’t use your LPFSA stability to pay for something however dental- and vision-related prices.

Additionally, despite the fact that your employer will withdraw your LPFSA contributions in equal quantities from every paycheck all year long, the complete stability is obtainable to you at first of the yr. The identical just isn’t true of your HSA stability, which solely turns into out there as funds are deposited. To make use of the funds you’ve contributed to your LPFSA, your plan administrator offers you a fee card, allow you to request reimbursement by examine or direct deposit by submitting a declare kind, or each. 

Instance of an LPFSA

You need to rigorously think about how a lot to contribute to your LPFSA. Let’s say your employer’s plan solely means that you can use it for certified dental and imaginative and prescient bills. Look over your out-of-pocket dental and imaginative and prescient bills from the final yr or two and decide which of them are thought of certified utilizing your employer’s abstract plan doc. Then you should use that data to create an inventory of your projected certified dental and imaginative and prescient bills for the approaching yr.

Your record of the earlier yr’s bills would possibly look one thing like this:

• Dental cleansing primary: $0 (100% coated by insurance coverage as a preventive service)
• Dental cleansing quantity two: $0 (100% coated by insurance coverage as a preventive service)
• Full set of dental X-rays: $0 (100% coated by insurance coverage as a preventive service)
• Two composite fillings: $100 every, $200 complete (50% coated by insurance coverage)
• Eye examination: $50 (80% coated by insurance coverage; you pay further for contact and glasses fittings)
• Prescription eyeglasses: $200 (not coated by insurance coverage)
• Prescription sun shades: $150 (not coated by insurance coverage)
• Contact lenses: $100 (not coated by insurance coverage)
• Prescription eye drops: $20 (80% coated by insurance coverage)

Complete: $720

You already know that subsequent yr, you’ll possible have two dental cleanings and a full set of X-rays once more. You don’t anticipate any fillings as a result of you have got good enamel and infrequently want dental work. You’ll get your annual eye examination, and also you’ll want one other yr’s price of contact lenses. However you received’t want new glasses or sun shades since you simply bought them. The prescription eye drops had been for a watch an infection that you simply don’t anticipate coming again. Neither your dentist nor your eye physician has given you a purpose to imagine that you simply’ll want something out of the abnormal within the coming yr.

Should you take a conservative estimate, chances are you’ll resolve to contribute $720 to your LPFSA. With this quantity, you could be pretty assured that you’ll spend the complete stability. If you wish to take an opportunity on having some more money to cowl one thing you aren’t anticipating, you would possibly contribute one other couple of hundred {dollars}.

Particular Concerns

You don’t need to contribute excessively to your LPFSA. Like an everyday FSA, it is potential you might lose any unused stability at–or shortly after–the top of the yr. Some plans both will let you roll over as much as a specific amount for the next plan yr or enable for a grace interval. A grace interval is a two-and-a-half-month interval at first of the next yr the place you may end spending the earlier yr’s stability.

Nevertheless, a plan received’t have each a carryover provision and a grace interval. (And the plan may not have both a carryover possibility or a grace interval.)

The one excellent news about any unused stability you lose is that you simply’ll be shedding pretax {dollars}. Should you’re within the 24% federal tax bracket, which means you’re shedding the equal of $76 that you might have gotten in take-home pay (for each $100 you contributed to your LPFSA over the $500 rollover quantity.)

That being stated, in the event you’ve solely contributed a small overage, you would possibly be capable of spend it down by buying an additional pair of glasses, pre-purchasing subsequent yr’s contact lenses, shopping for further contact lens answer, or making different certified purchases. Possibly you don’t really want a spare pair of glasses, however you would possibly resolve that having them is healthier than simply throwing away the cash you have saved.

In case your employer’s LPFSA means that you can spend the stability on any certified medical expense when you’ve met your deductible, the calculation will get a bit extra difficult. You’ll positively need to take a look at your medical bills for the final yr (or two). Do the bills that you simply’re more likely to incur subsequent yr add as much as greater than your deductible?

For instance, let’s say your high-deductible medical health insurance plan has a deductible of $3,000, and your projected medical bills are $3,500. In that case, you would possibly need to contribute an extra $500 to your LPFSA (along with the imaginative and prescient and dental bills and any cushion you already calculated).

The Backside Line

LPFSAs could be a good way to cut back your dental and imaginative and prescient bills—and in some situations, your different certified medical bills—when you have got an HSA. These preparations imply that you simply don’t have to thoroughly quit the advantages of an FSA when you have got an HSA.

Learn your employer’s abstract plan description to be sure to know what you should use LPFSA funds for and whether or not or not your employer’s possibility has a rollover provision or a grace interval. At this level, it is in your finest curiosity to do the maths and just be sure you contribute sufficient cash to maximise your tax financial savings (with out contributing greater than you’ll be capable of spend in the course of the yr).