Health and Welfare

Using a Limited-Purpose FSA in Conjunction with your HSA

Funds contributed to your Health Savings Account (HSA) can be used as a means for reimbursement for medical, dental, and vision expenses. So why would anyone ever choose to make a separate contribution to a Limited-Purpose Flexible Spending Account (FSA) that only covers dental and vision expenses when you already have an HSA for those expenses? Many of us overlook the added advantages of contributing to a Limited-Purpose FSA in conjunction with a HSA. There are a few principle reasons a person should contribute to both a Limited FSA and a HSA in order to get the most out of their HSA.

  • You plan on incurring eligible dental or vision expenses early in the plan year

FSAs (including Limited-Purpose FSAs) have been designed so that your full election is available on day 1 of the plan year. HSA funds are only available as the funds are deposited into your account. Because of that, if you are planning on incurring dental or vision expenses early in the plan year, a Limited FSA is a great way to plan to pay for those expenses. It may help to think of your Limited FSA election as a tax-free, interest free loan. And then think of your HSA as an actual bank account (which it is). With your Limited FSA, you can use your full election as soon as you need to in order to pay for eligible expenses. This is especially helpful if you have just opened your HSA and haven’t had the time to allow your HSA balance to grow.

  • You want to save your HSA contributions for future medical expenses

Dental and vision expenses are usually easier to predict than medical expenses. When you are covered by a High-Deductible Health Plan (HDHP) and you know you may be required to pay higher amounts for the medical expenses you incur it especially makes sense to contribute towards your Limited FSA for dental and vision expenses that you plan on incurring. That way you can preserve HSA contributions to be used for medical expenses. In the instance you don’t have many medical expenses, your HSA balance can grow, tax-free, and you were still able to pay for your dental and vision expenses with tax-free funds through your Limited FSA.

  • Your medical expenses are high enough that you will use the full HSA contribution limit to pay for your medical expenses each year

If you know your medical expenses are going to meet or exceed the annual contribution limit for your HSA and you plan on incurring dental and vision expenses as well, using your limited FSA is a great way to maximize your tax savings. Most employers who offer HSAs and Limited FSAs design their Limited FSA so the benefit can open to a full FSA once you have met the statutory deductible provided by the IRS. That means your Limited FSA can also help you cover out of pocket medical expenses. By planning correctly, your Limited FSA can act as an additional resource to pay for your healthcare expenses on a pre-tax basis.

  • You wish to use your HSA as a primary/additional retirement or investment account or to cover health-related costs in retirement

HSAs are often explained as providing a triple-tax advantage. That means you get a tax advantage on your contributions towards your HSA, your distributions from your HSA (if used for eligible expenses), and any interest you earn from your HSA. Studies have shown that most people anticipate that only 10% of their expenses in retirement will go towards healthcare, when a more realistic estimate is actually 30%. HSAs are most powerful when they are used as a means for retirement, especially with the idea in mind to use those funds to pay for healthcare expenses. You may be cheating yourself if you are using your HSA funds to cover dental and visions expenses when you could be using your Limited FSA instead (while still getting the same tax advantage on your dental and vision expenses). By using your Limited FSA for dental and vision expenses you can get the most of the triple-tax advantage available with your HSA.

Although each person’s situation is unique, there are many situations where it makes sense to contribute to both your HSA and Limited FSA. It may take some planning but will pay off if you plan correctly.