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:
- Eligible expenses are limited
Limited Flexible Spending Accounts only allow reimbursement of dental and vision related expenses.
- 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.