Glossary of Human Resources Management and Employee Benefit Terms
A limited purpose flexible spending account (FSA) is a type of account that allows you to set pre-tax money aside for vision and dental expenses not covered by insurance. Unlike a standard or medical FSA, you can use a limited purpose FSA in conjunction with a health savings account (HSA).
Only individuals who are enrolled in a high deductible health plan (HDHP) can open a limited purpose FSA. Additionally, it’s up to the employer to decide whether they will offer their employees the option of opening a limited purpose FSA. An employer may decide to only offer an HDHP with an HSA.
A limited purpose FSA is meant to be used in conjunction with an HDHP and HSA to cover out-of-pocket vision and dental expenses. Here are some common cases for using a limited purpose FSA:
An employer offers an HDHP but no vision or dental insurance
An employer offers an HDHP and only vision insurance
An employer offers an HDHP and only dental insurance
Because HSAs have yearly contribution limits, an employee may want to put aside additional pre-tax funds to pay for vision and dental out-of-pocket expenses.
Each year, the Internal Revenue Service (IRS) set a new contribution limit for medical saving accounts. For 2020, the contribution limit for limited purpose FSAs and regular FSAs is 2,750 dollars.
There are only two restrictions for using a limited purpose FSA. The first we already discussed, which is that employees must already be enrolled in an eligible HDHP and HSA.
The second restriction applies to how employees are able to spend the money in their limited purpose FSA. In most cases, a limited purpose FSA will operate like a regular FSA in that you lose any funds that you do not use at the end of the year. In other words, the money will not roll over into the next year like it does in an HSA.
Employers may choose to grant employees a grace period, meaning that they’ll have a certain amount of time at the beginning of the year to use up any remaining funds. Alternatively, employers can allow some funds to roll over into the next year, though that is limited to 500 dollars. This rolled-over sum does not count against the next year’s contribution limit. Plans may either offer a grace period or a partial rollover of funds but not both.