Limited-Expense FSA

Let's face it: Being an HR leader at a fast-growing startup or midsize business requires you to wear multiple hats. You need to be an expert at juggling budgets and navigating regulations while seeking new ways to boost employee satisfaction.

The role requires you to advocate for employee benefits and provide your colleagues with the best benefits packages. On the other hand, you also need to take on the role of a financial wizard, crunching numbers to lower healthcare costs for your employer.

It's a tricky balancing act, which, at times, can feel overwhelming and frustrating.

Worry not! We've got your back. Enter the limited-expense flexible spending account (LEX FSA), a powerful tool in your arsenal that allows you to boost employees' well-being while potentially reducing your employer's healthcare costs. Read on to learn how to strategically use LEX FSAs to benefit both employees and employer.

What is a limited-expense FSA?

Also known as a limited-purpose flexible spending account (LPFSA), the limited-expense FSA is a type of flexible spending account that's available to employees enrolled in a health savings account (HSA). Just like an HSA allows employees to set aside pretax money from their paychecks to pay for eligible medical expenses, the LPFSA enables employees to set aside pretax money to pay for qualified dental and vision care expenses.

The Internal Revenue Service (IRS) allows employees to have either an HSA or a standard FSA. However, employees are eligible for both an HSA and a limited-expense FSA. The LPFSA allows employees to use their pretax dollars to pay for eligible expenses, including but not limited to the following:

• Dental fillings
• Dental cleanings
• Invisalign orthodontics
• Fluoride treatment
• Retainers
• Cataract surgery
• Contact lenses and lens cleaning solution
• Prescription eyeglasses
• Vision exams
• Eye drops
• LASIK surgery
• Vision correction procedures

You can think of the LEX FSA as a piggy bank you provide for your employees on top of their HSAs. They can set aside extra money from their paychecks for dental and vision care.

Differences between an FSA and an LPFSA

In simplest terms, an LPFSA is a type of FSA. As the term implies, limited-expense FSAs are more restricted in their scope. The money you set aside in this fund can be used only for qualified dental or vision care expenses. In contrast, funds from an FSA can apply to various medical expenditures, including vision and dental healthcare.

How does a limited-expense FSA work?

The limited-expense FSA is available to employees only via their employers. They cannot open this account on their own. The contribution limit for 2024 is $3,200. The IRS sets this limit and usually increases it annually to account for inflation.

Let's explain how the LPFSA works with an example. Imagine that an employee is planning on getting a routine dental cleaning for $200 and new prescription glasses for $500. The employee can contribute $700, pretax, to the LPFSA throughout the year.

When the employee goes for the dental cleaning and vision exam, they can pay for it using the amount set aside in their LPFSA. Since this money is pretax, the employee has essentially reduced their taxable income and saved on the taxes they would have paid on this $700.

Key factors to consider

• The LPFSA can be used together with an HSA. Employees must be enrolled in a high-deductible health plan and use an HSA to qualify for the LPFSA.
• Most LPFSA funds have a "use it or lose it" clause. Any unused funds expire at the end of the specified period.
• Employees cannot use these funds for purposes other than qualified dental and vision care expenses.
• As mentioned above, an LPFSA has an annual contribution limit of $3,200 for 2024, an increase of $150 from 2023.
• Employees can operate an LPFSA only through their employer's benefits package. They cannot open it on their own.

LPFSA advantages for employees

Here are a few reasons why an LPFSA can be advantageous for your employees:

• Reduce taxes: An LEX FSA allows employees to contribute a specific amount from their pretax earnings toward dental and vision care expenses. This reduces their taxable income, resulting in increased take-home pay.
• More attractive benefits package: Offering an LPFSA on top of an HSA provides employees with greater control over their healthcare costs. This could serve as a differentiator, helping you establish an exceptional employee benefits program that boosts employees' morale and satisfaction.
• Proactive healthcare: An LPFSA empowers employees to prioritize dental and vision care, potentially reducing their future healthcare costs while keeping them healthy.

LPFSA advantages for employers

Here are a few reasons why offering LPFSA is beneficial for employers:

• Cost-effectiveness: LEX FSAs can lead to lower healthcare costs for the employer. When they take advantage of preventive dental and vision care, employees may experience fewer health complications requiring more expensive treatments down the road.
• Increased employee satisfaction: Offering a benefit that directly impacts employees' wallets and well-being demonstrates a commitment to their health and financial security. This can boost employees' morale, increase your employees' satisfaction, and potentially lower your turnover rate.
• Attracting and retaining talent: LEX FSAs can be a valuable differentiator in a competitive job market. By offering this benefit, you demonstrate to potential employees that the company prioritizes the health and financial security of its employees, which can help you attract and retain top talent.

Grace periods and carryovers for LPFSAs

Like with a standard FSA, it's not recommended to contribute excessively to the LPFSA. As mentioned above, any unused balance in the account is lost at the end of the year. However, some plans offer a grace period or allow account holders to roll over their unused balance to the following year. Generally, most providers offer a grace period of up to two-and-a-half months, during which employees can finish spending the previous year's accumulated balance.

For LPFSAs that offer carryovers, the maximum amount you can carry over from 2023 to 2024 is $610. That said, if employees have a small amount left in their LPFSA for a specific year, they can spend it by:

• Purchasing extra contact lenses or lens solution
• Purchasing a spare pair of prescription eyeglasses
• Going in for dental cleanings
• Making any other qualified purchases

Can employees enroll in a limited-expense FSA without an HSA?

No. The limited-expense FSA is not a standalone benefit. Employees must be enrolled in a high-deductible health plan and have an HSA to qualify for the LPFSA. Think of the LPFSA as an added wellness incentive.

The takeaway: An LPFSA is a win-win for both employees and employers

Offering an LPFSA as part of your healthcare benefits package is an excellent way to show employees that you care about their physical and fiscal well-being. It helps them proactively take care of their dental and vision health while reducing their financial burden and possibly helping them save a few tax dollars.

It's an excellent choice for companies that offer a health plan with a lower premium but a higher deductible. The LPFSA can help cover employees' dental and vision expenses before they reach the deductible in their HSA.

So consider adding an LPFSA as part of your company's benefits package, as it's a win-win for all: You save money for your employer, and your employees enjoy better health coverage.

Ready to connect with other HR rock stars and lower costs for your employer? Join Nava Benefits' vibrant HR community and stay ahead of the curve on HR best practices.