Limited Purpose Flexible Spending Account (LPFSA)
Limited-purpose flexible spending accounts (LPFSAs) are managed differently than the more traditional FSA. The LPFSA is only associated with those who have enrolled in high-deductible healthcare plans (HDHPs) and HSAs (Healthcare Savings Accounts) and need the means to save for anticipated dental and vision expenses.
What is a Limited Purpose Flexible Spending Account (LPFSA)?
Limited-purpose flexible spending accounts are directly associated with HDHPs, which require a plan participant to pay a high out-of-pocket deductible. Similarly to FSAs, employers determine whether or not they will offer LPFSAs to their employee base as a pre-tax benefit. The employer has the right to define the plan, including contribution limits that are lower than those outlined by the U.S. government. Limited Purpose FSAs are typically more restrictive than traditional FSAs and limited to covering medical expenses not covered by the participant’s healthcare plan, such as dental and optical expenses.
If they choose to self-fund the plan, the employer has the flexibility to allow employees to use their pre-tax LPFSA funds before fulfilling their healthcare plan deductible for their:
- Copays
- Coinsurance payments
- Deductible payments
These expenses are generally limited to LPFSA eligibility after the plan’s high deductible has been satisfied. This is partly because employers can offer employees access to healthcare spending accounts (HSAs) in conjunction with the HDHP and the LPFSA. Since HSAs are also an eligible pre-tax deduction, allowing typical healthcare expenses to be reimbursed from LPFSA funds prior to meeting the insurance deductible risks “double-dipping” — withdrawing eligible expenses from multiple pre-tax plans. Unlike HSAs, however, the annual elected balance contribution is available from a Limited FSA at the beginning of the year. Funds from an HSA bank are only available as they are accrued.
Why is understanding Limited Purpose Flexible Spending Accounts important to my business?
Like the traditional FSA, you as the business owner are responsible for deciding if you will offer an LPFSA. If you do, you will need to:
- Define the plan, including its parameters
- Develop a complete legal plan document that will be distributed to participants
- Ensure a separate account is developed to hold participants’ LPFSA funds
- Arrange for strong oversight and administration of the plan
- Provide quarterly reporting regarding plan administration and compliance
As with an FSA, there are contribution limits involved with an LPFSA; however, there is no acknowledgment of a difference between individual and family accounts. The maximum contribution for 2023 is $3,050. Unlike FSAs, there is an automatically allowed rollover amount from one plan year to the next — the 2023 allowable rollover to the 2024 plan year is $610, which is 20% of the total annual contribution limit. It is also important to note that offering an HSA bank alongside an LPFSA is not optional. Without enrolling in an HSA, a participant is not eligible to contribute to an LPFSA. Additionally, a traditional FSA cannot be offered in conjunction with an LPFSA.
What is the history of Limited Purpose Flexible Spending Accounts?
Limited-purpose flexible spending accounts were developed to offer employees a means to receive reimbursement for a portion of eligible FSA expenditures who only have access to high-deductible healthcare plans and healthcare spending accounts.
Summary
Limited-purpose flexible spending accounts are designed to allow employees to save pre-tax funds that aren’t covered by their high-deductible healthcare plans. These are intended to reimburse employees as they cover dental and optical expenses. LPFSA funds also allow certain healthcare reimbursements once the participant’s health plan deductible has been satisfied. Limited FSAs can only be offered alongside HSA banks and HDHPs.
