With the rising cost of health insurance, many consumers are opting for high deductible health plans (HDHPs) to keep their medical premiums affordable, especially when they’re relatively young, comparatively healthy, and don't spend much of their budget each year visiting a doctor. However, many people enrolled in qualified HDHPs are disappointed to learn they can no longer, by law, participate in a traditional flexible spending account (FSA).
The nature of how these plans are designed leaves some wondering how they’ll cover all the expenses incurred prior to reaching their deductible, which has led to the rise of health savings accounts (HSAs) and limited purpose flexible spending accounts (LPFSAs).
Only those enrolled in qualified HDHPs are eligible to open an HSA and reap the tax benefits, but many are unaware that they’re also eligible to open a limited purpose FSA (providing their employer offers one), which frees up the money in their HSA for future use — even retirement.
What Is a Limited Purpose FSA?
HSAs are usually a major selling point of HDHPs. They allow participants to set aside a portion of their income from each paycheck in order to pay for qualifying healthcare expenses. Limited purpose FSAs are like HSAs in that participants can contribute a specific amount from each paycheck. LPFSAs are like traditional FSAs in that they make funds available immediately, rather than forcing you to wait until enough money has accumulated to access the money you need for necessary vision and dental care (whereas HSAs require funds to be in the account before reimbursement can occur).
As the name might suggest, limited purpose FSAs aren't intended to be used for the same wide range of expenses covered by HSAs. Instead, they're designed to be limited to just dental and vision expenses — oftentimes, specific expenses as defined by the limits of the plan.
What's Covered By a Limited Purpose FSA?
A limited purpose FSA specifically covers vision and dental expenses that may or may not be already covered by a HDHP. But since limited purpose FSA savings are “use it or lose it,” it makes sense to deplete this balance first. They cover a wide range of necessary treatments or purchases that can be difficult to cover when a policyholder is expected to come up with the funds immediately.
An annual eye exam used to be included in most health insurance policies, but escalating prices have caused insurance companies to pare down their benefits, which means policyholders oftentimes have to pay out-of-pocket. Limited purpose FSAs can help people get the necessary vision screenings they need and the corrective lenses they can’t live without. Expenses covered by an LPFSA include:
- Eye exams, including necessary tests and screening as well as contact and glasses prescriptions
- Procedures that are designed to correct your vision, like laser-correction
Routine dental care can go a long way toward taking care of potential problems before they become serious issues. Unfortunately, routine dental care is expensive if you don't have dental insurance.
Not only that, dental emergencies are often unpredictable and there are many dental procedures that aren’t covered by insurance. You never know when you'll need a root canal, a filling, or an unexpected tooth extraction (followed by a costly implant). Fortunately, your limited purpose FSA will help cover many of those expenses, including:
- Regular dental visits
- Orthodontic care, including braces, retainers, and other visits
- Dental cleanings
- X-rays at the dentist
- Copays for dental visits
- Routine dental procedures, including crowns, root canals, tooth extractions, fillings, and other care
What Isn't Covered by a Limited Purpose FSA?
Limited purpose FSAs aren’t intended to replace traditional HSAs, nor are they used the same way. An LPFSA is meant to supplement HDHPs and HSAs, which is why they only cover vision and dental expenses. This means traditional medical expenses, from prescription medications to emergency room visits, are not covered by the LPFSA.
Limited purpose FSAs are also not intended to pay for normal over-the-counter personal care items. You won't be able to use it to pay for contact lens solution or cases, dental floss, toothpaste (not even specialty toothpaste, like Sensodyne), eye drops, or other common items. They are strictly for the use of dental and vision care that would otherwise be eligible for coverage (at least in part) by an insurance policy.
What if An Expense is Eligible for Both an LPFSA and an HSA?
If an expense is eligible for payment from both an LPFSA and an HSA, the participant will need to choose which account they wish to have cover the expense. You can't double-dip and use both accounts. Oftentimes, these savings accounts will be administered by the same company and they’ll be able to track this.
Because limited purpose FSA funds do not carry over from year to year, it would be wise to use the funds in the FSA prior to dipping into your HSA. Leave those HSA funds for future large medical expenditures or for roll over into future plan years (or even retirement).
When is Money Available from a Limited Purpose FSA?
The funds from a limited purpose FSA fall under what is called “uniform coverage rules,” which means they’re available immediately and in full at the beginning of the calendar year. The plan calculates the amount a participant decided to contribute throughout the course of the year and makes that money available up front. If someone has committed to $100 per month, for example, then they'll have $1,200 available to them at the beginning of the calendar year. They'd then proceed to pay the plan back throughout the rest of the year. If the participant leaves the company before the end of year, your employee cannot recoup the difference.
This is particularly useful for policyholders if they need something more expensive early in the year, like new glasses, contacts, or dental work. Of course, with an HSA, that money would have to be already present in the account in order for the expense to be reimbursed. That said, participants can be reimbursed retroactively once funds are available.
When Can You Use LPFSA Funds?
Limited purpose FSA funds are available only during the plan year in which a policyholder is enrolled in a HDHP. This is determined based on when the vision or dental expenses were incurred, not on when the expenses are billed or when the policyholder is expected to pay for them. If you received the services before your plan year kicked in, you'll need to find another method of payment for those services.
How Much Can You Contribute to an LPFSA?
The employee cap for LPFSA contributions in 2018 is $2,650, however, employers have a little bit of leeway in their plan design. In some cases, enrollees may be able to change the amount of this contribution based on specific criteria. In other cases, a specific plan may have a lower cap.
There are no limits to the amount that can be contributed by an employer. If you, the employer will be contributing to your employees’ limited purpose FSAs, make sure your employees take that into account before deciding on their own contributions.
Can You Have Both an HSA and a Limited Purpose FSA?
Yes, enrollees can have both an HSA and a limited purpose FSA if you offer both (and your employees are enrolled in a qualifying HDHP). Each savings account is intended for different purposes in this case. These funds are intended to provide coverage for employees who have high deductible health plans and will incur significant expenses before the deductible is covered.
How Much Should You Contribute to an LPFSA?
Because limited purpose FSAs don’t roll over year to year, and because the contributions can’t be adjusted during the year (unless you experience a QLE) enrollees will want to calculate their planned expenses for the calendar year. If they know each member of their family will need an eye exam and new lenses in their glasses, they know one of their children will need braces, or their spouse needs to have a tooth pulled, go ahead and account for those expenses, but they shouldn’t contribute more than what they know they’ll need.
Tracking expenses is usually easy through the third party administrator’s online portal. Participants can check their balance, track claims, print out forms for requested documentation, and see previous years’ expenses so they can calculate what they might need for next year.
What If You Don't Use the Entire Contribution Amount?
As the employer, the participants in this situation will need to check with you to determine what options are available to them. This may include:
- A grace period during which they can continue to use funds left over from the previous year.
- The ability to carry over up to $500 (as set by the IRS) for the next plan year.
- A run-out period when they can submit claims that were incurred during the plan year, but hadn't yet been submitted.
Make sure your employees are familiar with the options offered by your company. In general, there's a "use it or lose it" policy in place with regards to limited purpose FSAs, meaning that if they don't use the available funds before the end of the grace period or run-out period, they may lose them (the benefit administrator usually keeps these funds).
If a participant know they'll have significant vision and dental expenses throughout the course of an average year, a limited purpose FSA is a great way to help prevent all of those expenses from hitting their bank account at once. Remember they can only change the amount withheld from their paycheck during the annual enrollment period.
If you want to learn more about what a limited purpose FSA can do for you, contact us today!