A Limited Purpose FSA is also called a Limited Purpose Flexible Spending Account (LPFSA). This is a kind of savings plan funded with pre-tax dollars. A limited purpose FSA is used for dental and vision expenses that are not covered by health insurance.
What’s unique about a limited purpose FSA is that an individual can use it in tandem with a health savings account (HSA). This is what makes it distinct from a standard FSA which cannot be used with an HSA. Also, as the name implies, a limited purpose FSA is more limited than a standard FSA in that its funds are reserved to pay for dental and vision expenses, and other costs that are not covered by other health plans.
The funds in a limited purpose FSA can be used through a payment card. However, another option is for employees to submit claim forms with the necessary attachments such as detailed and itemized receipts for reimbursements.
For an employee to contribute to a limited purpose FSA, their employer will deduct contributions in a predetermined, equal amount each pay period. Because LPFSAs are funded with pretax dollars, this reduces the taxable income of the employee which is a tax benefit.
Who can open a Limited Purpose FSA?
A person cannot just open a limited purpose FSA if they want to. It needs to be set up through an employer that allows LPFSAs. This means that a limited purpose FSA is not available for individuals who are unemployed, self-employed, or retired.
When can an employee use a limited purpose FSA?
As we have mentioned above, a limited purpose FSA can be used in tandem with a health savings account or HSA to pay for vision and dental expenses. Examples of qualified vision and dental expenses are oral prophylaxis (dental cleaning), dental fillings, prescription glasses, and contact lenses.
Is there a limit to contributions that can be made to a Limited Purpose FSA?
Yes, there is. For 2021, the annual contribution limit for a limited purpose FSA is $2,750. This is the same limit set in 2020 and has not been changed.
I have a Limited Purpose FSA but have not used it to pay for anything. Can I cash out unused contributions?
No, you are not allowed to cash out unused funds of a limited purpose FSA. Generally, you will lose the remaining unused money in your LPFSA. However, what happens to the remaining balance will also depend on the kind of limited purpose FSA that your employer has set up.
For unused funds, there are two options available. First, the Internal Revenue Service (IRS) allows a maximum of $550 to be carried over to the following year. Keep in mind that the amount that is rolled over does not count as a contribution for the following year. The other option is for employers to allow a grace period where employees can use the remaining balance within the first 2 ½ months of the next year. A note to employers, only one of these options (rollover or grace period) can be done, not both.
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