Limited Purpose FSA
A Limited Purpose FSA (LPFSA) is a restricted version of a healthcare FSA available to employees enrolled in a High Deductible Health Plan (HDHP) who also contribute to a Health Savings Account — the LPFSA covers only dental and vision expenses, preserving HSA compatibility by not overlapping with medical expense coverage.
The Health Savings Account is one of the most powerful tax-advantaged accounts available to US consumers, offering a triple tax advantage: pre-tax contributions, tax-free growth, and tax-free withdrawals for qualified medical expenses. However, HSA eligibility is strictly conditioned on enrollment in an HDHP and having no other disqualifying health coverage. A standard healthcare FSA constitutes disqualifying coverage because it can reimburse general medical expenses, placing it outside the framework that allows HSA contributions.
The Limited Purpose FSA was designed to thread this needle. By restricting reimbursement to dental and vision expenses only — categories the IRS has ruled do not disqualify HSA eligibility — employees can use an LPFSA to capture pre-tax savings on predictable dental and vision costs while maintaining full HSA eligibility for medical expenses. Orthodontia, dental cleanings, restorations, eyeglasses, contact lenses, and LASIK surgery are common LPFSA expenses.
The contribution limit for an LPFSA equals the general healthcare FSA limit (set by the IRS annually, $3,300 for 2025). Contribution limits for the LPFSA and HSA are independent — electing the maximum LPFSA contribution does not reduce HSA contribution room.
The strategic benefit of the LPFSA within a broader HSA household strategy is significant. Rather than drawing down HSA funds for dental and vision expenses — which reduces the long-term compounding value of HSA investments — participants can segregate those predictable costs into the LPFSA while preserving HSA balances for higher medical expenses or long-term accumulation. For households treating the HSA as a long-term investment vehicle for retirement healthcare funding, this division of purpose maximizes the tax advantage on all eligible healthcare spending.
The use-it-or-lose-it rule applies to LPFSAs as it does to standard FSAs. Employers may offer the grace period or carryover relief, but not both. Careful annual enrollment planning — estimating dental and vision costs accurately — is essential to avoid forfeiting contributions.