Limited Purpose FSA: A cautionary tale.

Hello boys and girls.

Today I’m going to tell you a story. It’s a true story. The story began last year and is still going on today. I hope you listen, because I want you to learn from the mistakes you’re about to read. This is a mistake that should not be repeated.

A year ago in a land not so far away, there was a lady. This lady’s name is Kate. Kate is a responsible lady. She was nearly done paying off her student loans from law school and was starting to get a handle on her finances.

Kate was settling into the working world. This was her first calendar year as a full-time employee. She was looking to take advantage of all her employee benefits. What did she have available?

Some of the choices had easy answers.

  • 401k… Heck yes! Let the saving continue!
  • Transit Card… Yes, please. Not paying for parking AND an extra cheap way to get to work? What a deal!

Then things got a little more detailed.

  • Dental plan… yes, but only the preventative plan. Teeth are important.
  • Health insurance… a must! Sh went with the High Deductible Low Premium plan because she’s a baller.
  • HSA… Oh yes! Like it, love it, gotta have it!

Then things got dicey.

She had the option to sign up for a Limited Purpose FSA (LPFSA). If you aren’t aware, there are a few types of FSAs, which stands for Flexible Spending Account. You can have them for daycare, general medical expenses or in this case, limited purposes. The LPFSA is only good for dental and vision expenses.

FSAs are in addition to any other pre-tax spending accounts. The LPFSA is only available if you are eligible for a Health Savings Account. Kate was eligible for an HSA, so she was eligible to elect the LPFSA.

The identifying feature of an FSA is it’s “Use it or Lose it” feature. The employer essentially advances you money on January 1. The entire amount you elect to pay back over the year is available for your use on that day. Then over the year, you pay the company back with your paychecks. If you don’t use the entire balance you elected to pay back, you lose that money at the end of the year. This money is used to fund the health plan of the company, but it is also used to cover the potential loss when employees elect to use an FSA and the employee leaves the company before the money is paid by the employee. Sneaky little job jumping monkeys.

At the time of enrollment, Kate’s main squeeze Hubs was expecting to get some dental work done in 2015. Kate, being the little saver she is, didn’t want to touch the HSA balance that she was working so hard to build. To keep the HSA account in tact, while still completing the dental work, Kate elected to put $1000 into the LPFSA.

What happened next is where the tale turns sad.. but in a good way? It turned out that Hubs didn’t need any of the dental work he was planning on. He got a new dentist and realized the previous one was a disaster. Over the next two cleanings, he didn’t even have a cavity!

Planning to need dental work and not needing any dental work is an easy way to have a lot of money left over in your LPFSA. Thankfully for Kate and Hubs, the IRS changed their guidelines in recent year about what you have to use or lose. Instead of losing all of it, you can now roll over $500 into the next plan year.

So what does that mean? Of the $1000 set aside, $500 can be rolled over to next year. Of the $500 Kate needs to use or lose, she’s used roughly $260. $120 for 3 treatments of adult fluoride, $9 on super fancy fluoride toothpaste and the rest on Kate’s cavity. That leaves roughly $240 to use or lose.

$240 is a lot to lose. It’s probably not enough for Kate to stress about as much as she has, but it’s still a significant chunk of money. 2015 could be deemed the year of the FSA with all the time she’s spent thinking about it. She still has an opportunity to spend the money. She could use a new mouthguard. This could bring the loss down to zero.

Then she’ll have to go through all of this again next year when she has to use another $500.

Never again will Kate set aside money in an LPFSA. I urge you to use caution as well.

Any questions?

EDIT: This post original said LPFSA can pay for preventative care expenses. This was hopeful and inaccurate. LPFSAs can only be used for dental and vision expenses.

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15 comments

  1. (but seriously, does neither of you have vision needs? New glasses! Prescription sunglasses! The options are infinite. Buy some fancy frames! Get your teeth whitened!)

    1. No vision needs at this time. We are both glasses and contact free, thanks to the PRK surgery I had 4 years ago. I do need a correction/update but I’m not planning on that for a year or two. The correction will cost ~$140 for the complete exam which still leaves money on the table.

      And our teeth are white! No whitening needed. Killing an LPFSA is hard when you don’t need stuff.

  2. This nearly happened to us last year, but right before the end of the year, two of the kids got sick… doctor’s bills for the win?! We always use some… and it’s worth keeping some for us in our health FSA (not just dental,… but everything)… but we need to be careful about how much we keep. Good reminder to check our balances!

    1. FSAs can sneak up on the best of us. Glad you got out of last year without losing anything. Check your balance to make sure you are safe this year!

      I wish this was in a normal FSA. I would have burned through the balance already. It has been a spendy medical year, just not with dental or vision! 😩

  3. Can you maybe use this for a gym membership or something of that nature? “Preventative care” is kind of a vague term, and I have heard of people who’ve been able to use an account like this to go towards exercise costs. (Honestly I’d even call buying vegetables at the supermarket “preventative care”, but I’m guessing they wouldn’t go for that.) I like C’s suggestion of prescription sunglasses too!
    That being said, I hear you that it would be nice to just have the money back. :/

    1. Unfortunately, preventative is only good for a few prescriptions and services. Think diabetes care, blood pressure meds, etc. The blood work next week is my last hope. Otherwise, mouth guard it is!

  4. I’m confused on the bloodworm — I didn’t think limited purpose FSAs could be used for anything other than dental and vision? Maybe your plan is different than mine. I put in $500 last year. I wanted to do more but we weren’t positive that my husband was going to have LASIK, but I knew that I definitely needed some fillings. We ended up using it all by April, when he had his surgery, and used the HSA to pay for the rest.

      1. You’re correct. Ugh. Conflicting information got me. I found a few resources that said preventative was covered. Perhaps it was all just wishful thinking. I should book my appointment to have the mouthguard made. I’ll update. Thanks.

  5. Ugh — this is why I fear FSAs. I did one once, for one year, for like $200, and it stressed me out all year. And that was even when you could use it on Advil and OTC meds! (I know — I’m risk averse in a big way, but I’m getting better.) Another idea for how to spend it — could you buy some regular, nonprescription sunglasses and just buy them from the optometrist? Maybe even sell them on eBay if you really don’t need them? Could you prepay for your next dental cleaning? Don’t know if that’s legal, but seems worth asking — the Frugalwoods prepaid for their birth!

    1. The worst. I don’t think I’ll ever do an FSA again even if I could really use the money.

      I haven’t looked into pre-paying and I don’t think non-prescription glasses are an option. I should really stop procrastinating and figure this out. I’m on the verge of losing many dollars!!

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