The employee benefits world is full of acronyms, and two of the most important to your employees – and sometimes also among the most misunderstood – are FSAs (Flexible Spending Accounts) and LPFSAs (Limited Purpose Flexible Spending Accounts).
Below, we highlight the difference between these two so that you can easily explain them to your employees – or if you wish, simply send them the link to this blog post and your job will be done!
What is an FSA?
An FSA is a kind of financial account that allows employees to save a portion their earnings, which can be then be used to cover qualified expenses as per the workplace health insurance “cafeteria” plan (so-called because it allows employees to choose between different types of benefits).
Notably, the FSA dollars are not subject to payroll taxes, which means that employees get “more bang for their buck”. Specifically, given that the 2016 Social Security tax rate is 6.2 percent and the Medicare tax rate is 1.45 percent, employees can effectively purchase approximately $1.07 worth of healthcare for each dollar in their FSA (note, the Social Security tax ceases for both employers and employees when salary reaches $118,000; there is no cut-off limit for Medicare tax).
Furthermore, while in the past money in a FSA was subject to a “use it or lose it” rule, this has changed per the Patient Protection and Affordable Care Act (ACA). Now, employees can roll over up to $500 FSA dollars each year.
Differences Between FSAs and HSAs/HRAs
Before looking at the LPFSAs, it is helpful to take a moment and clarify how FSAs differ from HSAs (health savings accounts) and HRAs (health reimbursement accounts).
HSAs and HRAs are typically used as part of consumer-driven (a.k.a. “third tier”) health care plans, which allow employees to use funds in these accounts to directly pay for routine healthcare costs. FSAs, however, are typically offered with more traditional health plans.
What’s more, unlike FSAs, funds in an HSAs or HRA do not expire when the plan comes to an end (note, this is not the same as carrying over funds – as noted above, employees can carry over $500 of their FSA dollars from year to year).
What is an LPFSA?
An LPFSA is a kind of financial account that employees can enroll in if they already have an existing HSA account. Funds from either account can be used to cover the sizeable out-of-pocket expenses waiting for a claim to be paid under a high deductible health plan (HDHP). However, LPFSA dollars are typically reserved for covering vision and dental costs, while those HSA dollars are typically reserved for covering medical expenses.
Another unique feature of LPFSAs, is that employees can access funds that do not yet technically exist in the account. This is because the amount available to is the annual pledge amount – not the actual amount they have accrued from paycheck deductions.
Have More HR Questions?
If you have additional HR questions, contact the experts at Connected Benefits today. Our in-house HR experts regularly support our clients with advice, guidance and insight.