Maximizing Your Savings: Tips for LPFSA and HSA Holders

Does your company offer both a Health Flexible Spending Account and a Health Savings Account? Are you unsure which account is better for you – and time is ticking before you must decide?  You might feel like you must pick one plan.  But there is a strategic loophole that allows you to use both:  the Limited Purpose FSA.

By pairing these two accounts, you can maximize your immediate tax savings while protecting your long-term investments. To help you determine the perks of each account and how to participate in both, we’ve created this guide that can be used as an easy reference throughout the year.

Understanding a Limited Purpose FSA (LPFSA)*

A Limited Purpose FSA is a special kind of Health FSA that is restricted to only allow dental, vision and preventive medical expenses that are not covered under your health plan.  This type of plan does not reimburse HSA-eligible expenses.  Additionally, only employees who are enrolled in a Health Savings Account (HSA) and High-Deductible Health Plan are eligible to have a Limited Purpose FSA.

*Please note:  your employer must allow for a Limited Purpose FSA to be offered.  For more information about adding this option, please contact P&A’s Sales Team.  

Why Are LPFSA Expenses Limited?

Expenses in a Limited Purpose FSA are restricted so that they do not reimburse the same expenses as an HSA.  By limiting the FSA, employees who meet the criteria to enroll in an HSA can enroll in both plans – and further increase their savings – if they choose to do so.

However, it’s important to remember that unused funds in an FSA are forfeited at the end of the plan year, unless your company offers a grace period or carry over provision.  We highly encourage account holders to plan carefully before signing up for an FSA – make sure you are budgeting for predictable expenses you anticipate on having in the coming year.

Limited Purpose FSA Eligible Expenses

A sample list of eligible expenses includes:

• Artificial teeth/dentures
• Braces
• Braille – books and magazines
• Contact lenses and eyeglasses
• Dental fees
• Lasik eye surgery
• Over-the-counter items for dental and vision
• Preventive medical services (as outlined in your high-deductible health plan)
• Seeing eye-dog and maintenance

How a Limited Purpose FSA & HSA Work Together

Let’s say your Open Enrollment window is open and you’ve decided to enroll in both a LPFSA and an HSA.  Your plans are effective soon, and you want to make sure you have a good understanding of how to use both plans throughout the coming months.

1. Use the LPFSA for the “Now:” Use your LPFSA funds for predictable dental and vision costs—like braces, new contacts, or your annual eye exam.
2. Save the HSA for the “Future:” Because HSA funds never expire and can be invested in the stock market, every dollar you don’t spend today has the potential to grow into a significant retirement nest egg.
3. Triple Tax Savings – “Now & Future:” HSA contributions are tax-free going into the account, funds grow tax-free and withdrawals on qualified expenses are tax-free!

By paying for your glasses with an LPFSA instead of your HSA, you keep your HSA balance untouched and growing tax-free.  This strategy gives consumers more access to pre-tax funds and helps employees reduce their taxable income.