What is a Limited Purpose Flexible Spending Account?
A Limited Purpose Flexible Spending Account (LPFSA) is a type of tax-advantaged account designed to help employees save money on out-of-pocket healthcare expenses. Similar to a traditional Flexible Spending Account (FSA), an LPFSA allows employees to set aside pre-tax dollars from their paycheck to pay for qualified medical expenses. However, there are some key differences between the two that make an LPFSA a more restricted option for certain individuals.
Understanding the Basics of an LPFSA
An LPFSA is a specific type of FSA that is limited to certain healthcare expenses, such as prescription medications, insulin, and over-the-counter (OTC) drugs. Unlike a regular FSA, which can be used for a wide range of qualified medical expenses, including deductibles, copayments, and coinsurance, an LPFSA has a narrower scope. This makes it an attractive option for employees who have high prescription medication costs or other healthcare expenses that fall within the LPFSA’s parameters.
Eligibility and Enrollment
To be eligible for an LPFSA, an employee must be enrolled in a high-deductible health plan (HDHP) through their employer. An HDHP is a health insurance plan that has a higher deductible than a traditional health plan, but typically offers lower premiums. Employees must also meet certain requirements, such as not having any other health coverage that would disqualify them from contributing to an LPFSA.
Enrollment in an LPFSA is typically done during the annual open enrollment period or during a qualifying life event, such as marriage, the birth of a child, or a change in employment status. Once enrolled, employees can begin contributing to their LPFSA, with contributions being made on a pre-tax basis, which means they will not be subject to federal income tax, Social Security tax, or Medicare tax.
Using an LPFSA
Once an employee has contributed to their LPFSA, they can use the funds to pay for eligible healthcare expenses. To do so, they must obtain a receipt or proof of payment for the expense and submit it to their employer or the FSA administrator. The funds can be used to pay for expenses directly or to reimburse the employee for out-of-pocket costs.
It’s important to note that an LPFSA has a “use it or lose it” rule, similar to a traditional FSA. Any unused funds at the end of the plan year must be forfeited, with the exception of a $500 carryover amount allowed for some LPFSAs. This rule is designed to encourage employees to use their funds for eligible expenses within the plan year.
Benefits and Considerations
The primary benefit of an LPFSA is the tax savings it provides. By contributing to an LPFSA, employees can reduce their taxable income, which can lead to significant savings on their taxes. Additionally, the funds in an LPFSA are not subject to a 20% penalty tax that may apply to HSAs (Health Savings Accounts) if funds are used for non-qualified expenses.
However, there are some considerations to keep in mind when choosing an LPFSA. Since the account is limited to certain expenses, employees may find that they cannot use the funds for other healthcare costs that are covered by their HDHP. Additionally, the $500 carryover amount may not be sufficient for some individuals, depending on their healthcare needs.
In conclusion, a Limited Purpose Flexible Spending Account is a valuable tool for employees who have high prescription medication costs or other healthcare expenses that fall within the LPFSA’s parameters. By understanding the basics of an LPFSA and its benefits and considerations, employees can make informed decisions about whether an LPFSA is the right choice for their healthcare needs.
