Internal Revenue Service (IRS) rules clarify that you can’t contribute to a Health Savings Account (HSA) and a Flexible Spending Account (FSA) in the same plan year. But there may be opportunities where you can?
Let’s talk about it.
There are a couple types of FSAs that you can in fact pair with an HSA. One type is called a Limited Purpose Flexible Spending Account (LPFSA). Another is a Dependent Care Flexible Spending Account (DCFSA).
For this article we’ll stick mostly to LPFSA. Even though “limited” is in the name, it’s anything but limited. In fact, you can pay for thousands of eligible dental and vision expenses with an LPFSA.
Best of all, pairing an LPFSA with an HSA could help you create more savings than either account by itself. Below we explain the different FSA types, then show you how to combine an HSA with an LPFSA to take your health savings to the next level.
Understanding FSA types
All FSA types let you make pre-tax payroll contributions to pay for eligible expenses. But what counts as an eligible expense differs between the account types.
Healthcare FSAs let you pay for all eligible medical expenses, including dental and vision expenses. LPFSAs restrict expenses to eligible dental and vision expenses exclusively. And DCFSAs restrict expenses to eligible dependent care expenses exclusively.
All eligible medical expenses, including dental and vision
Limited Purpose FSA
Eligible dental and vision only
Dependent Care FSA
Eligible dependent care only
HSA + LPFSA: What are the benefits?
One big decision you may need to make during annual enrollment is whether you want an HSA or a healthcare FSA. If you choose HSA, then the IRS requires that you enroll in an HSA qualified high-deductible health plan.
Like a traditional healthcare FSA, your HSA lets you pay for thousands of qualified medical expenses, including dental and vision expenses. So, on the one hand, you could use the HSA for all your qualified medical expenses (you can search thousands of qualified items at the HSA store).2
But since the LPFSA is an HSA-compatible account, some members elect both benefit options and then claim all their eligible dental and vision expenses through the LPFSA. This lets them save more money in their HSA for long-term investing3 and future qualified medical expenses.
If you choose this approach, it gives you the opportunity to potentially do more with your HSA. Here are four things you can do with both accounts in tandem.
#1 Max your annual HSA contributions
Let’s say your family estimates it will spend $350 at the dentist and $750 for contacts and eye exams ($1,100 total for dental and vision expenses). If you pay for these items with your HSA, it effectively reduces your potential annual HSA health savings (since $1,100 of your total contribution will be spent from your account).
To keep more of your HSA money, it might be a good idea to contribute the max to your HSA and then also contribute an additional $1,100 to an LPFSA. Then you can use your LPFSA to pay for those expected dental and vision expenses, while still saving the full annual maximum in your HSA.
You can always view the latest IRS contribution limits at this page.
Not sure what you can purchase with an LPFSA? Check out this article: Top 10 ways to spend your LPFSA.
#2 Max your annual tax savings
Let’s say you choose to max out both your HSA and your LPFSA. You’ll be able to contribute $10,000+ across both accounts (be sure to keep in mind HSA contribution limits).
In effect, this will amount to a $10,000+ tax deduction on your state and federal income taxes.4 If your family pays, say, a 20% effective tax rate, then you could unlock more than $2,000 annual savings! There’s enormous tax-saving possibility when you max out both accounts.
#3 Get your dental and vision money immediately
So far, we’ve been talking about maxing out one or both accounts. Obviously, that’s a lot of money each year and contributing that much won’t necessarily make sense for everyone.
But even if you’re not maxing out one or both of the accounts, there is still a great reason to make contributions to an LPFSA: Your entire annual contribution amount will be available on the first day of the new plan year.
To follow the example above, let’s say your family plans to spend $1,100 on eligible dental and vision expenses. That $1,100 will appear in your LPFSA on the first day of the new plan year. This is sort of like getting an advance from your organization.
Then, your employer will generally deduct $1,100 from your paycheck over the course of the year in equal parts. So, if you get, say, 24 paychecks each year, just divide $1,100 by 24. In this example, you would expect around $45 in LPFSA payroll deductions in each paycheck throughout the year.
In most cases, HSA contributions are only available as you make contributions. Though if your organization offers an employer contribution for electing a high-deductible health plan, that money could be available on the first day of the plan year.
So, be sure to check plan documents for details and any available employer contributions.
#4 Invest your HSA for the long-term
Finally, using your LPFSA to pay for expected near-term dental and vision expenses will give you the opportunity to invest the money in your HSA to potentially capitalize on tax-free account growth. In most cases, it’s not ideal to invest your HSA funds if you plan to spend the money in the near term. Investing involves risk, including the loss of principal. You don’t want to lose money you will need this year.
That’s why a lot of members don’t invest unless they have a long-term view. Maybe they won’t need the money for a few years (or longer), so they’re more comfortable assuming the risks associated with investing.
Using an LPFSA gives you added flexibility, enabling you to save HSA resources for longer-term savings.
Two things to keep in mind as you plan LPFSA contributions
Most of the benefits of an LPFSA stem from careful planning. If you’re not sure exactly how much you plan to spend this year on dental and vision expenses, you may not want to use an LPFSA. That’s because LPFSA funds carry an expiration date. They are use-it-or-lose-it accounts and unspent LPFSA funds are eventually returned to your employer.
Some employers, however, offer carryover options, which let you carry over a portion of your unused funds into the next plan year. Others may offer a grace period extension, which could give you a couple extra weeks or months at the end of the plan year to spend down remaining account funds. Be sure to review your plan documents to see if these options are available.
When it comes to HSAs, however, funds never expire. You keep your HSA money year after year, even if you change employers, health plans, or retire. So, if you’re not sure how much you will spend on dental and vision expenses, it may be a good idea to stick with the HSA exclusively. This will give you maximum flexibility.
If you don’t end up spending your money—just keep it.
The next thing to keep in mind is that some organizations offer an HSA contribution match. An HSA contribution match works much like a 401(k) contribution match. Some employers match your HSA contributions dollar-for-dollar up to a certain amount. Others may instead do a 50% match.
As you consider your contribution strategy for the next plan year, try to capture the full employer contribution match if one is available. It’s essentially free money for you!
In other words, consider prioritizing the HSA match over the LPFSA. Don’t leave free money on the table.