Did you know that Limited Use FSA's are the perfect complement to your Health Savings Account (HSA)? It's true.
While the Limited Use FSA differs from a Traditional FSA, they work in the same manner. Employees choose how much money they want to set aside in their account, based on the plan's limits of course, on a pre-tax basis. These funds are used to pay for eligible expenses. Just like the Traditional FSA, any money not used at the end of the plan year are forfeited. You may better know this rule as "use it or lose it". The key difference between the Limited Use and Traditional FSA's - Reimbursements are limited to eligible DENTAL and VISION expenses only.
Health Savings Accounts
As you may be aware, health savings accounts (HSA's) were created so that individual can use tax favorable funds to pay for eligible medical expenses. Unlike most other plans, the money in an HSA can be invested and grow on a tax-deferred basis. There's no use it or lose it rule. To be eligible to contribute to an HSA, the individual must be covered (enrolled) under a qualified high deductible health plan (HDHP) and cannot:
- Be covered under any other health insurance that is not a high deductible health plan (like an HMO) or receive coverage from a spouse's plan
- Be eligible to be claimed as a dependent on another person's tax return
- Be entitled to Medicare benefits
HSA's save employers money by lowering the company's taxable payroll. Many employers choose to share a portion of these savings as contributions to their employees' HSA's to help employees meet the cost of their deductible.
While an individual who owns an HSA can participate in a traditional FSA, they are prohibited from contributing to their HSA while covered under the traditional FSA (or their spouse's traditional health FSA). It is important to point out that an individual covered under a Limited Use FSA can continue to make contributions to their HSA while using their pre-tax FSA funds to pay for eligible dental and vision expenses.
One of the main purposes of a health savings account is to allow the individual to use pre-tax dollars to meet the out-of-pocket obligations of the high deductible health plan. While eligible dental and vision expenses can be paid through an HSA, many individuals prefer to limit the use of the HSA money to cover the health plan deductible and other out-of-pocket medical expenses. By offering a Limited Use FSA to your employees, you give them the power to use pre-tax dollars for eligible dental and vision expenses while preserving HSA funds. Remember, these dollars can gain in value and are not subject to the use it or lose it rule that applies to FSA's.
To maximize both employer and employee savings, you can design the cafeteria plan to include HSA contributions. Doing this allows employers and employees to make pre-tax contributions to the employees' HSA's and limited use FSA/s (subject to applicable rules and limitations). These contributions are not subject to withholding from wages for income tax or subject to FICA, FUTA or the Railroad Retirement Act.