Have you considered adding a limited-purpose flexible spending account (FSA) option to your company’s health care coverage options? Before your employees start contributing to a limited-purpose FSA, they need to know how this type of health plan works and how it can be advantageous for them. A limited-purpose FSA is similar to a general-purpose health FSA—the difference being that there are fewer eligible expenses.
The main advantage of FSA funds is that employees can pay for qualifying expenses tax-free while reducing their taxable income.
Employees are not allowed to contribute to both a health savings account (HSA) as well as a standard (non-limited) health flexible spending account (FSA). They are, however, eligible for an HSA if they use a limited-purpose FSA for their dental and vision care needs. This will allow your employees to maximize their savings and tax benefits.
As an employer, you have the option of incentivizing a limited-purpose FSA by reimbursing standard FSA-qualified health care expenses as your employees meet their deductible. This would cause your employees’ limited health care FSA to work like a standard health care FSA and will not limit it to dental, vision or preventive care. Employees would remain eligible for an HSA once meeting their limited-purpose FSA deductible.
FSAs employ a “use-it-or-lose-it” model. If you do not use the funds that you contribute to your limited-purpose FSA within the end of the year, you will have to forfeit those funds. However, employers also have the option of allowing employees to carry over up to $500 of unused funds from one year to the next. In addition, any amount that is carried over does not count toward the maximum contribution limit.
In a limited-purpose FSA, covered health care procedures are limited to dental, vision and preventive care. Over-the-counter medicines are not covered under an FSA without a doctor’s prescription (except for insulin).
There are contribution limits to FSAs. The contribution limit for 2019 is $2,700. There is also no “double-dipping,” meaning that employees are unable to pay for a medical procedure using their FSA as well as an additional plan or program, such as an HSA.
Typical eligible limited FSA expenses:
Vision correction procedures
Typical ineligible limited FSA expenses:
Medical expenses (deductibles, coinsurance and copays)
Alcohol and drug rehab expenses
This Benefits Insights is not intended to be exhaustive nor should any discussion or opinions be construed as professional advice.