This article is general information, not tax, insurance, legal or financial advice. Whether such accounts exist at your employer, and how they work, differs by country, plan and year. Your plan documents and a qualified professional are the right sources for details.
What a limited purpose account is
A limited purpose account is a version of a flexible spending account that can only be used for a narrow set of costs, most often dental and vision. A general-purpose health flexible spending account can usually pay for a wide range of medical costs. A limited one is deliberately restricted, which is where the name comes from.
The account is typically offered by an employer during open enrollment, funded through payroll in the same way as other flexible spending accounts, and subject to similar kinds of yearly limits and plan-year deadlines. It usually sits in the employer’s plan and follows employment rules, not personal ownership rules.
Why the restriction exists
The main reason is compatibility with a health savings account. A health savings account generally requires that you are covered by a qualifying high-deductible plan and that you do not have certain other health coverage. A general-purpose health spending account can count as that other coverage, because it can pay for medical costs before the deductible is met. That can make a person ineligible to contribute to a health savings account.
A limited version avoids the problem. Because it only pays for dental and vision, which are usually not covered by the main medical deductible anyway, it generally does not interfere with eligibility for the health savings account. This is the sort of rule that is technical and can change, so confirm it with your plan administrator or a tax professional before relying on it.
What it typically covers
Exact lists vary, but common eligible items include:
- Dental. Cleanings, fillings, crowns, extractions, root canals, and often orthodontic work. Costs that insurance leaves to you, such as copays, coinsurance and amounts above a plan’s yearly cap, are usually the target.
- Vision. Eye exams, prescription glasses, contact lenses and sometimes vision correction procedures.
It generally does not cover general medical costs such as doctor visits or prescription medicines, at least until the plan says otherwise. Some limited accounts are designed to also reimburse general medical costs only after a deductible is met. That is a different design, and employers describe it in their plan documents.
How it can sit alongside other accounts
In the typical pairing, a person might have:
- A high-deductible medical plan.
- A health savings account for general medical costs.
- A limited purpose account for dental and vision.
- Separate dental insurance and vision insurance, which are different from the accounts and pay claims under their own terms.
Each piece does a different job. The health savings account is individually owned, can usually be used for a broad range of qualifying costs and can carry over. The limited purpose account is employer-based, narrower and may be subject to year-end deadlines. The dental and vision insurance plans pay a share of covered services after you pay premiums.
An illustration
Consider a hypothetical person with a $200 copay after insurance for a dental crown service and $350 for new glasses beyond what a vision plan covers. A limited purpose account might reimburse those two out-of-pocket amounts, which together equal $550, because $200 plus $350 is $550. That example is made up. Actual costs, benefit limits and reimbursement amounts depend on your insurance and plan.
Meanwhile, a general doctor visit during the year would typically be paid from the health savings account or out of pocket, not from the limited account.
Where the money can overlap with insurance
Dental and vision plans often have their own annual maximums or allowances. Once those are used up, you pay the remainder. A limited purpose account can be a way of paying for what the plan does not cover. Many plans also have waiting periods or exclusions, and in those cases the account might be one of the few ways to pay with pre-tax money, if eligible. Dental annual maximum and contact lens benefit are details that vary by plan and are worth reading in your benefits summary.
Remember that you generally cannot be reimbursed twice for the same cost. The account usually covers only what you actually owe after insurance.
Planning how much to set aside
Dental and vision costs can be somewhat predictable, which makes this kind of account easier to estimate than general medical costs. Examples that people often know in advance:
- Regular cleanings and exams
- Ongoing orthodontic treatment with a payment schedule
- A pair of glasses or contacts each year
- Known dental work that a dentist has recommended
Use-it-or-lose-it rules apply in the same way as for other flexible spending accounts: money left over at year end may be forfeited unless the plan offers a grace period or carryover. Because unplanned dental needs are possible but unpredictable, a cautious approach is to elect an amount you are fairly sure you will use.
Points to check
- Does your employer offer one? Not every employer does.
- Do you need it? If you do not have a health savings account or high-deductible plan, a general-purpose account may be simpler.
- What exactly is covered? Look at the list of eligible costs and exclusions.
- What is the yearly limit? Government and employer limits both apply.
- What is the deadline? Check for grace periods, carryover and claim submission dates.
- What happens if you leave? Typically, access ends, with some chance to submit claims for earlier expenses.
- Does it affect your health savings account eligibility? Ask the administrator to confirm it is designed for use alongside such an account.
Keeping records
Keep itemized receipts and any insurer statements showing what you owed. A dental office statement that lists the procedure, date and your portion is generally more useful than a card receipt with only a total.
Limited purpose accounts are a narrow tool, and they matter mainly for people who want both a health savings account and pre-tax help with dental and vision. Whether that arrangement is worthwhile depends on your costs, your plans and the rules in force, and the results are not guaranteed.