What is a Limited FSA and why offer one?

A Limited Flexible Spending Account is a savings option that allows employees to contribute on a pre-tax basis to set aside funds for certain eligible expenses. A Limited Flexible Spending Account works the same way as a general-purpose Healthcare Flexible Spending Account; however, there are two differences:

  1. Eligible expenses are limited
    Limited Flexible Spending Accounts only allow reimbursement of dental and vision related expenses.
  2. Limited Flexible Spending Accounts are compatible with Health Savings Accounts 
    An employee that is contributing to a Limited Health Flexible Spending Account can also contribute to a Health Savings Account. The IRS states that an individual cannot have both a Health Savings Account and a general-purpose Healthcare Flexible Spending Account since both allow reimbursement of medical expenses. However, a Limited Health Flexible Spending Account allows participants to continue their HSA contributions for medically related expenses while additional dental and vision related expenses can be reimbursed from a Limited Flexible Spending Account.

Employers that offer a general-purpose Healthcare Flexible Spending Account and plan to or are currently offering a Health Savings Account should offer a Limited Healthcare Flexible Spending Account to maximize their employee’s savings and tax benefits and to decrease the possibility that an employee will contribute to both a general-purpose Healthcare FSA and HSA in error.