What is a Limited Purpose FSA (LPFSA)?

Created by Kelly Knudsen, Modified on Fri, 19 Jan at 9:51 PM by Kelly Knudsen

A Limited Purpose Flexible Spending Account (LPFSA) is a type of tax-advantaged financial account that is designed specifically for medical expenses that are not covered by a health insurance plan with a high deductible, coupled with a Health Savings Account (HSA). LPFSAs are typically offered by employers as part of their benefits package to employees who are enrolled in a High Deductible Health Plan (HDHP) and an HSA.

The main purpose of an LPFSA is to provide a way for individuals with an HSA-compatible HDHP to set aside pre-tax funds to cover eligible dental and vision expenses. These expenses can include dental cleanings, orthodontics, eye exams, prescription glasses, contact lenses, and other vision-related costs. By using an LPFSA for these specific expenses, individuals can preserve the funds in their HSA for other qualified medical expenses, while still enjoying the tax advantages of contributing to an FSA.

It's important to note that an LPFSA is subject to the same rules and regulations as a traditional Healthcare FSA. Contributions made to an LPFSA are pre-tax, meaning they reduce an individual's taxable income, and the funds can be used to pay for eligible dental and vision expenses incurred by the account holder, their spouse, and their dependents. Like other types of FSAs, LPFSAs operate on a use-it-or-lose-it basis, and any unused funds at the end of the plan year may be forfeited, subject to certain exceptions or grace periods set by the employer.

Employers often provide information about contribution limits, eligible expenses, and guidelines for using LPFSAs in conjunction with HSAs. It's recommended that individuals carefully assess their anticipated dental and vision expenses for the year when deciding how much to contribute to their LPFSA to ensure that they maximize the benefits while avoiding the risk of forfeiting unused funds.

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