HR GlossaryLimited Purpose Flexible Spending Account (LPFSA)

Limited Purpose Flexible Spending Account (LPFSA)

Limited-purpose flexible spending accounts (LPFSAs) are managed differently than the more traditional general-purpose flexible spending account (FSA). The LPFSA is generally associated with employees who have enrolled in high-deductible health plans (HDHPs) and HSAs (Health Savings Accounts) and want to set aside additional pre-tax funds for dental and vision expenses. 

What is a Limited Purpose Flexible Spending Account (LPFSA)? 

Under IRS rules, you generally cannot have a general-purpose FSA and an HSA at the same time because both cover the same medical expenses. LPFSAs are designed to work alongside an HSA by restricting reimbursement for general medical expenses and typically only reimbursing eligible dental and vision expenses. This restriction is not a matter of employer discretion, but rather a requirement to preserve employees’ eligibility to contribute to an HSA, as coverage under a general-purpose FSA would otherwise be considered disqualifying coverage. 

Unlike HSAs, LPFSAs are subject to the uniform coverage rule, meaning the full annual election amount is generally available at the beginning of the plan year, while HSA funds are only available as contributions are made. 

Similarly to traditional FSAs, employers determine whether or not they will offer LPFSAs to their employee base as a pre-tax benefit.

Why is understanding Limited Purpose Flexible Spending Accounts important to my business? 

Like a general-purpose 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 plan document that will be distributed to participants
  • Ensure a separate account is established to hold participants’ LPFSA funds
  • Arrange for strong oversight and administration of the plan
As with a general-purpose FSA, LPFSAs are also subject to annual contribution limits set by the IRS; however, unlike HSAs, the limits are not based on whether the employee has individual or family medical coverage. Additionally, an employee cannot have both a general-purpose FSA and an LPFSA at the same time.

What is the history of Limited Purpose Flexible Spending Accounts? 

LPFSAs were established in the mid-2000s following the introduction of HSAs. Because IRS rules prohibit individuals with disqualifying coverage from contributing to an HSA, traditional general-purpose FSAs created a conflict. Subsequent IRS guidance clarified that FSAs could be structured to preserve HSA eligibility by limiting reimbursement to dental and vision expenses or by restricting coverage until after the HDHP deductible is met. These arrangements became known as Limited Purpose FSAs and are now commonly offered alongside HSA-qualified health plans.

Summary 

LPFSAs are designed for employees that also have an HSA and allows them to be reimbursed on a pre-tax basis for eligible dental and vision expenses. LPFSAs may also allow certain healthcare reimbursements once the participant’s health plan deductible has been satisfied, if the LPFSA plan is set up to allow for this.