How to Use a Limited Purpose FSA (LPFSA)

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

A limited purpose flexible spending account (LPFSA) is a special type of flexible spending account (FSA) that may be available if you are enrolled in a health savings account (HSA). An HSA is a type of savings account that lets you set aside pretax money to pay for qualified medical expenses. You usually will be given the option to enroll in a limited purpose FSA and HSA through your employer, who acts as a sponsor for these types of savings accounts.

Normally, the Internal Revenue Service (IRS) allows you to have either an HSA or an FSA but not both. However, you can have an HSA and a limited purpose FSA if your employer allows it.

You can use a limited purpose FSA to pay for vision and dental expenses before you’ve met your insurance deductible. Sometimes, an LPFSA can also be used for regular qualified medical expenses after you meet your deductible. However, this depends on the rules of the particular LPFSA that your employer offers.

How a Limited Purpose Flexible Spending Account Works

Typically, if you have an HSA, you’re not eligible to open a regular FSA. A regular FSA is different than an LPFSA. A regular FSA lets you use pretax dollars to pay for qualified medical expenses, including dental and vision expenses. An LPFSA lets you use pretax dollars to pay for qualified dental and vision expenses, such as:

• Dental cleanings
• Fillings
• Vision exams
• Contact lenses
• Lens solution/cleaner
• Prescription glasses

In some cases, an LPFSA also lets you use pretax dollars to pay for preventive care expenses that your health plan doesn’t cover. Whether you can or not depends on the plan your employer has set up. If your plan allows it, you can use an LPFSA to pay for any other qualified medical expenses (beyond dental and vision care costs) only after you meet your health insurance deductible.

An LPFSA, like an FSA, is only available to you if your employer offers it; you can’t open an account on your own. Under federal law, both also have an annual contribution limit of $3,200 in 2024, rising to $3,300 in 2025. The contribution amount is usually increased each year to account for inflation.

Limited Purpose Flexible Savings Account (LPFSA) vs. Health Savings Account (HSA)

Just like an LPFSA, an HSA has the advantage of letting you contribute pretax dollars, so it’s a good way to make your out-of-pocket medical expenses more affordable. However, HSAs are broader—they cover a variety of medical expenses, including dental and vision. In contrast, you can’t use your LPFSA balance to pay for anything but dental- and vision-related costs.

Also, even though your employer will withdraw your LPFSA contributions in equal amounts from each paycheck throughout the year, the entire balance is available at the beginning of the year. The same is not true of your HSA balance, which only becomes available as funds are deposited.

To use the funds you’ve contributed to your LPFSA, your plan administrator will either give you a payment card or let you submit a claim form to request reimbursement by check or direct deposit. For some plans, both options will be available.

How to Use an LPFSA

When setting up an LPFSA, you need to decide how much to contribute. You want to have enough to cover necessary expenses but not so much that you lose some of your money at the end of the year.

Let’s say your employer’s plan only allows you to use it for qualified dental and vision expenses. Look over your out-of-pocket dental and vision expenses from the last year or two. Determine which ones are considered qualified using your employer’s summary plan document.

Once you’ve identified your out-of-pocket expenses, use that information to create a list of the dental and vision expenses you expect will qualify in the coming year.

Your list of the previous year’s expenses might look something like this:

• Dental cleaning number one: $0 (100% covered by insurance as a preventive service)
• Dental cleaning number two: $0 (100% covered by insurance as a preventive service)
• Full set of dental X-rays: $0 (100% covered by insurance as a preventive service)
• Two composite fillings: $100 each, $200 total (50% covered by insurance)
• Eye exam: $50 (80% covered by insurance; you pay extra for contact and glasses fittings)
• Prescription eyeglasses: $200 (not covered by insurance)
• Prescription sunglasses: $150 (not covered by insurance)
• Contact lenses: $100 (not covered by insurance)
• Prescription eye drops: $20 (80% covered by insurance)

 Total: $720

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You know that next year, you’ll likely have two dental cleanings and a full set of X-rays again. You don’t anticipate any fillings because you have good teeth and rarely need dental work. You’ll get your annual eye exam and need another year’s worth of contact lenses. But you won’t need new glasses or sunglasses because you just got them. The prescription eye drops were for an eye infection that you don’t anticipate coming back. Neither your dentist nor your eye doctor has given you a reason to believe that you’ll need anything out of the ordinary in the coming year.

If you take a conservative estimate, you may decide to contribute $720 to your LPFSA. With this amount, you can be fairly confident that you will spend the entire balance. If you want to account for unexpected expenses, you might contribute another $200 for a total of $920.

Carryovers and Grace Periods for an LPFSA

You don’t want to contribute excessively to your LPFSA. Like a regular FSA, it’s possible you could lose any unused balance at the end of the year.

Some plans either allow you to roll over up to a certain amount for the following plan year or allow for a grace period. A grace period is a two-and-a-half-month period at the beginning of the following year where you can finish spending the previous year’s balance.

However, some plans may not offer both a carryover provision and a grace period.

During most years, employers may elect one of two ways to let unused FSA funds rollover: 

1. Carryover: Account-holders can carry over up to $640 from 2024 and up to $660 beginning in tax year 2025.
2. Grace period: Unlimited funds may be carried over and spent in the first two and a half months of the next plan year. At the end of two and a half months, all unspent carried-over funds are forfeited. 

The only good news about any unused balance you lose is that you’ll lose pretax dollars. If you’re in the 24% federal tax bracket, that means you’re losing the equivalent of $76 that you could have gotten in take-home pay (for every $100 you contributed to your LPFSA over the $500 rollover amount.)

That being said, if you’ve only contributed a small overage, you might be able to spend it down by:

• Purchasing an extra pair of glasses
• Pre-purchasing next year’s contact lenses
• Buying extra contact lens solution
• Making other qualified purchases

Maybe you don’t really need a spare pair of glasses, but you might decide that having them is better than just throwing away the money you’ve saved.

If your employer’s LPFSA allows you to spend the balance on any qualified medical expense once you’ve met your deductible, the calculation gets a bit more complicated. You’ll definitely want to look at your medical expenses for the last year (or two). Do the expenses you’ll likely incur next year add up to more than your deductible?

For example, let’s say your high-deductible health insurance plan has a deductible of $3,000, and your projected medical expenses are $3,500. If so, you might want to contribute an additional $500 to your LPFSA (in addition to the vision and dental expenses and any cushion you already calculated).

The Bottom Line

LPFSAs can be a great way to reduce your dental and vision expenses—and in some instances, your other qualified medical expenses—when you have an HSA. These arrangements mean that you don’t have to entirely give up the benefits of an FSA when you have an HSA.

Read your employer’s summary plan description to make sure you know what you can use LPFSA funds for and whether or not your employer’s option has a rollover provision or a grace period. At this point, it’s in your best interest to do the math and make sure you contribute enough money to maximize your tax savings (without contributing more than you’ll be able to spend during the year).