Need of a Limited-Purpose FSA with an HSA

[Guest Eric Dailey]

Our employer is getting set to offer a CDHP with an HSA next plan year. There is talk of adding a limited-purpose FSA. A couple of us are questioning the need of offering a limited-purpose FSA. What is the need of offering a limited-purpose FSA when an HSA is also offered?

The reason why a couple of us are questioning the need is that it is our understanding that whatever a limited-purpose FSA covers, the HSA covers as well. So, why have both?

We have read that some like to save money in the HSA and thus use the FSA, but if one has room to contribute the money one would put into the FSA into the HSA, then why even bother with the FSA? Just put all the money into the HSA. I realize some may want to use the HSA as a long-term savings vehicle, but employees can put that type of money into the Deferred Compensation plan or open an IRA. We are talking state government here. I doubt no employee has so much disposable income to save that he is running out of places to store it and would simply use the HSA for savings purposes.

I believe there is a limit on how much can be contributed to an HSA in a given year. If a person expects all health care expenses to exceed that amount, I can see where a limited-purpose FSA would be handy. But, if a person expects to have that much in medical expenses, then why would that person sign up for the CDHP? The person would choose a different plan (one of the many low deductible plans offered).

The only thing we can think of as to why a limited-purpose FSA might be needed is that you don't have to have the money all saved up in the FSA to spend it, unlike an HSA (that is our understanding with an HSA). So, if someone expects to incur dental/vision expenses early in the year that are large, then I can see why the person would want to put money into the FSA. But, over time, that person might build up savings in the HSA and would be able to use the HSA to cover large dental/vision expenses incurred early in the year.

I'd appreciate all comments and answers to my question above. Thanks.

[leevena]

Your thoughts/conclusions are essentially on mark. A couple of thoughts.

1. 2013 HSA contributions are limited to $3250 and $6,450. If I want to save even more money (as you suggested) and I have maxed out elsewhere, I would try to put my "medical reimbursement dollars" in the fsa so that I don't have to touch the hsa dollars. For example, if I believe I will have $1,000 of expenses (dental and vision), I would fund that in the fsa and allow the $3250 to remain there growing.

2. The limited fsa covers dental/vision, so if your benefits do not include those coverages this would be a good way to pre-fund and use tax-free. Also, and I know this can be cumbersome and complicated for some people, but most times it is better for an employee to fund their dental/vision via a fsa than via insured plans. My wife wears glasses and it is actually cheaper for us to go a provider as private pay then to pay premiums. Same with dental, we have found that dentists will discount their charges considerable if we offer to pay cash. So when I consider how much premium I pay, and the max of $1000 or $1500 per year I get, this works out better for us.

3. Your comment about state government and lack of disposable income, while it is generally accurate, I think you would be surprised to find out how easy it is for an average income to take advantage of this strategy. Not to say that it is rampant, but by the time some people hit their 50's, kids out of the house, big expenses have come and gone, a few extra hundred dollars a month appear and it could easily land in the "savings" pool somewhere.

No arguments from me, you have essentially understood the issue, just some thoughts.

Good luck