What is a Limited Purpose FSA?

A limited purpose flexible spending account (FSA) is a type of account that allows you to set aside pre-tax money for vision and dental expenses that aren't covered by insurance.  Unlike a standard or medical FSA, you   can use a limited purpose FSA in conjunction with a  health savings account (HSA) .

Who is eligible to open a limited purpose FSA?

Only individuals who are enrolled in a high deductible health plan (HDHP) can open a limited purpose FSA. Additionally, it is up to the employer whether to offer its employees the option to open a limited purpose FSA. The employer may decide to offer only HDHPs along with HSAs.

When should you use a limited purpose FSA?

Limited purpose FSAs should be used in conjunction with HDHPs and HSAs to cover out-of-pocket vision and dental expenses. Here are some common cases for using a limited purpose FSA:

• Employer offers HDHP but not vision or dental insurance
• An employer only offers HDHP and vision insurance
• Employer provides only HDHP and dental insurance

Because HSAs have annual contribution limits, an employee may want to set aside additional pre-tax funds for vision and dental expenses.

What are the contribution limits for a limited purpose FSA?

Each year, the Internal Revenue Service (IRS) sets a new contribution limit for medical savings accounts. For 2020, the  contribution limit for a limited-purpose FSA and a regular FSA  is $2,750.

What are the restrictions for using a limited purpose FSA?

There are only two restrictions to using a limited-purpose FSA. The first restriction, which we've already discussed, is that employees must already be enrolled in a qualified HDHP and HSA.

The second restriction applies to how employees can spend the money in their limited purpose FSA. In most cases, a limited purpose FSA will work just like a regular FSA, in that you lose any funds not used at the end of the year. In other words, the money won't roll over to the next year like an HSA.

Employers may choose to give employees a grace period, meaning they will have a certain amount of time to use any remaining funds at the beginning of the year. Alternatively, employers may allow some funds to rollover into the next year, although this is limited to $500. This rollover amount does not count against the following year's contribution limits. Plans may offer either a grace period or a  partial rollover of funds  , but not both.