Overview
Flexible Spending Accounts (FSAs) are valuable tools that allow employees to set aside pre-tax dollars to pay for eligible healthcare expenses. Healthcare FSAs come in different types, with two common categories being Limited-Purpose FSAs (LPFSA) and Full-Purpose FSAs (or simply “Healthcare FSAs”). Understanding the differences between these accounts and the process for converting an LPFSA to a full-purpose FSA is important for maximizing benefits.
Certain HRA (Health Reimbursement Arrangements) can also be set up as limited-purpose accounts.
What is a Limited-Purpose FSA (or HRA)?
An LPFSA is a specific type of FSA that restricts the types of expenses that can be reimbursed. Typically, an LPFSA can only be used for dental and vision expenses. This makes it especially useful for employees who are also contributing to a Health Savings Account (HSA), as HSAs are not allowed to be paired with a full-purpose FSA or HRA.
By limiting the scope of eligible expenses, an LPFSA (or Limited-Purpose HRA) preserves the tax advantages of the HSA, which can be used for a broader range of healthcare expenses, such as prescriptions, doctor visits, and medical procedures.
What is a Full-Purpose FSA (or HRA)?
In contrast, a Full-Purpose FSA allows for reimbursement of a wide array of eligible healthcare expenses, including doctor visits, prescriptions, and eligible over-the-counter items. This makes it a more versatile option for employees who do not have an HSA. An HRA can also be defined to cover these types of expenses and can be thought of as a full purpose HRA.
Converting a Limited-Purpose Account to a Full-Purpose Account
During the active plan year, it may be possible to convert a limited-purpose account to a full-purpose account, if these conditions are met:
The plan sponsor has defined the limited FSA or HRA plan as one that allows for mid-year conversion of accounts.
The plan participant has met the minimum requirement for a high-deductible health plan (HDHP) as defined by the Internal Revenue Service (IRS).
What is the IRS-defined Deductible?
Each year, the IRS specifies the minimum deductible threshold that a healthcare plan can adopt and still be considered a HDHP.
More precisely, the IRS specifies two threshold amounts: a deductible minimum for single coverage and one for family coverage. For example, for 2025, the IRS included the following in a published update:
“For calendar year 2025, a ‘high deductible health plan’ is defined under § 223(c)(2)(A) as a health plan with an annual deductible that is not less than $1,650 for self-only coverage or $3,300 for family coverage.”
As a participant, to convert your limited account to a full account, you must meet the threshold amount that applies to your coverage tier—single or family.
The current year deductibles (as well as prior year) are easily found by doing an online search for: [year] IRS HDHP minimum
Note: the IRS minimum deductible that you must meet to convert your account from limited to full purpose is usually NOT the same as your health insurance deductible. For the purpose of converting your account, it is the IRS minimum deductible, not your health insurance deductible, that you must meet.
Exception: your plan sponsor may require a deductible threshold higher than the IRS minimum for plan participants to be eligible to convert their limited-purpose account to full-purpose (the plan sponsor cannot, however, define a deductible threshold lower than the IRS minimum).
Why Convert a Limited-Purpose Account to a Full-Purpose Account?
Upon converting the account
You can use your remaining funds for a much broader range of eligible expenses incurred after the conversation date and for the remainder of the plan year.
This typically includes medical expenses as well as dental and vision expenses. However, your plan sponsor may have limited the types of expenses covered under your specific plan.