FSA Contribution Limits: Employer Planning Guide

For health FSA plan years beginning in 2026, employees may elect up to $3,400 in salary reductions, and a plan that permits carryover may allow up to $680. Texas employers should update documents, payroll and enrollment materials together. Carryover is optional, cannot coexist with a health FSA grace period, and is separate from a new salary-reduction election.

What are the health FSA limits for 2026?

2026 feature	Limit or condition
Employee salary-reduction election	$3,400
Carryover, if the plan permits	$680
Grace period, if adopted instead of carryover	Up to 2 months and 15 days after the plan year ends

The contribution and carryover figures come from Revenue Procedure 2025-32. Carryover does not reduce the new year’s salary-reduction ceiling. Follow the applicable plan-year terms, including any lower limit selected by the employer, and distinguish employer contributions from employee salary reductions.

Can a health FSA offer carryover and a grace period?

No. IRS Notice 2013-71 permits a health FSA carryover instead of, not alongside, a grace period. A grace period allows use of remaining prior-year funds for eligible expenses incurred during up to the first two months and 15 days of the next plan year. A claims submission deadline is not the same as extra time to incur expenses.

Who can participate and what happens to unused money?

IRS Publication 969 explains that eligible employees may participate in an employer’s health FSA; self-employed individuals are not eligible. Employees generally elect salary reductions annually. The employer may also contribute under the plan’s terms; do not substitute an invented universal employer-only dollar cap for a review of the plan design.

Health FSAs generally follow use-it-or-lose-it rules, subject to a permitted carryover or grace period adopted by the plan. Expenses must be eligible and substantiated. A general-purpose health FSA can disqualify HSA contributions; review HSA eligibility before coordinating the accounts.

How are dependent care limits different?

Dependent care assistance is a separate benefit, not part of the $3,400 health FSA ceiling. For taxable years beginning after December 31, 2025, the federal exclusion limit is $7,500, or $3,750 for married individuals filing separately, subject to other eligibility and earned-income rules. The IRS describes the amended statutory limits in Internal Revenue Bulletin 2026-37; the bulletin’s proposed nondiscrimination regulations are distinct from the enacted dollar limits. Confirm your plan’s adopted terms before communicating elections.

What should employers update before enrollment?

Match election systems, plan documents and payroll to the applicable annual limit.
Confirm whether carryover, a grace period or neither is adopted.
Explain expense-incurrence and claim-submission deadlines separately.
Keep health FSA and dependent care materials distinct.
Coordinate owner eligibility, employer funding and HSA-compatible account design with the administrator.

Review the Section 125 plan requirements before changing pretax benefits.

General information for employers, not legal, tax, or medical advice; plan documents and current rules control.

Contact PCI Solutions to review your employee benefits options.

Frequently Asked Questions

Does a carryover reduce the new election limit?

No. A permitted carryover is separate from the new plan year’s salary-reduction election limit.

Is carryover required?

No. The employer’s plan must adopt it. Otherwise unused funds follow the plan’s applicable forfeiture or grace-period terms.

Can a general-purpose health FSA affect an HSA?

Yes. Coverage that can reimburse general medical expenses usually prevents HSA contributions. Review properly designed limited-purpose alternatives with the administrator.