Updates to 2026 FSA Limits Released

Quick Facts

• On October 9, 2025, the Internal Revenue Service (IRS) released IRS Revenue Procedure 2025-32, which updates maximum limits for health flexible spending arrangements (FSAs) and commuter benefits.
• These limits are adjusted annually for inflation.
• Limits for Dependent Care Assistance Programs (DCAP) are not addressed in the IRS guidance; however, the One Big Beautiful Bill (OBBB), signed in July 2025, updated these limits starting in 2026

Background

Through Revenue Procedure 2025-32, the Internal Revenue Service (IRS) updates a variety of 2026 adjusted tax limits. Among other things, the notice indicates that employee contribution limits toward health FSAs and qualified transportation fringe benefits will increase starting in 2026. The limit on annual employee contributions toward health flexible spending accounts (FSAs) is $3,400 in 2026, with the ability to carry over up to $680. The limit on monthly contributions toward qualified transportation and parking benefits for 2026 is $340.

Health Flexible Spending Arrangements

The 2026 annual contribution limit of $3,400 for health FSAs applies to employee contributions. The same limit applies to general-purpose and limited-purpose health FSAs. Employer contributions are not subject to the limit but are subject to different restrictions under healthcare reform rules.

Employee Health FSA Contributions

Employee contributions subject to the $3,400 annual limit include:

• Amounts deducted pre-tax from an employee’s compensation through a cafeteria plan; and
• Employer flex credits that the employee has the option to use toward cash or other taxable benefits.

Employees may elect to carry over up to $680 in 2026 even if they’ve carried over up to $660 from the 2025 plan year. In addition, employees who join mid-plan year may still elect up to $3,400 for the remainder of the plan year. The limit applies per employee, rather than on a household basis, so if both spouses are employed and eligible for health FSA coverage, each spouse could contribute up to $3,400 for 2026. Finally, the limit applies on a per-employer basis, so an employee who works for two separate employers that are unrelated (i.e., not part of a controlled group or affiliated service group due to common ownership or shared services), whether simultaneously or at different times during the same plan year, may elect up to $3,400 under each employer’s health FSA.

Employer Health FSA Contributions

Employer contributions may be made in addition to the $3,400 allowed for employee contributions. However, a health FSA must meet “excepted benefit” status to avoid violating health care reform requirements. To meet excepted benefit status, the health FSA must satisfy both of the following conditions:

• Maximum Benefit Condition. The maximum benefit payable under the health FSA to any participant cannot exceed the greater of: (a) 2x the participant’s salary reduction election; or (b) the amount of the participant’s salary reduction election plus $500. In other words, the employer can contribute up to $500 or a match of the employee’s contribution (up to $3,400 for 2026), whichever is greater.
• Availability Condition. Other non-excepted group health plan coverage (e.g., major medical coverage) must be made available for the year to those eligible to participate in the health FSA. Therefore, individuals must be eligible for both a group medical plan and a health FSA, but they do not have to be enrolled in both.

Carryovers and Grace Periods

The combination of employee and employer contributions elected for the plan year must be made available throughout the plan year in order to reimburse qualifying medical expenses, even if the amounts have not yet been contributed (the “uniform coverage” rule). If an employee exhausts the funds and then terminates participation mid-plan year, the employer cannot request repayment. However, if the employee does not incur enough expenses during the plan year to exhaust the amounts contributed, the employee will forfeit the remaining balance (the “use-or-lose” rule), subject to any grace period or carryover provision in place for the plan. Plans can have up to a 2 1/2-month grace period, or a carryover of up to $680 (for 2026), but not both.

Qualified Transportation Fringe Benefits (Transportation & Parking)

Instead of annual contribution limits, qualified transportation fringe benefits are subject to monthly limits. The 2026 monthly limit of $340 applies separately to:

• Qualified parking
• The combination of commuter highway vehicles and transit passes

An employee could elect up to $340/month for each or use funds toward a combination of transportation and parking benefits. For qualified transportation fringe benefits, both employee and employer contributions count toward the monthly limit.

Just like contribution limits apply monthly, employees generally have an opportunity to change commuter benefit elections monthly, or even more frequently. Unused contributions cannot be cashed out, but they can be used in subsequent months. So, if an employee fails to use all amounts contributed for qualified transportation or parking benefits and then terminates coverage, the leftover amounts would be forfeited. However, if the employee continues participation in the plan and reduces contributions for future months, unused amounts from one month may be used for coverage in later months up to $340 in any given month.

One Big Beautiful Bill

Earlier this year, the One Big Beautiful Bill (OBBB) increased limits for Dependent Care Assistance Program (DCAP), also known as the Dependent Care Flexible Spending Accounts (FSAs), salary reductions to $7,500 for single or married filing jointly filers and $3,750 for individuals who are married filing separately. This was the first statutory increase in DCAP contributions since 1986. This change is effective for tax years starting January 1, 2026, and after.

Also, as part of the OBBB, effective tax years starting January 1, 2026, salary reductions for qualified bicycle commuting will no longer be excluded from taxable income. This reduction was temporarily suspended by the Tax Cuts and Jobs Act but was made permanent by the OBBB.

For more information on the OBBB, access our prior Compliance Matters Alert released in July 2025.

EPIC Employee Benefits Compliance Services

For further information on this or any other topics, please contact your EPIC benefits consulting team.

EPIC offers this material for general information only. EPIC does not intend this material to be, nor may any person receiving this information construe or rely on this material as, tax or legal advice. The matters addressed in this document and any related discussions or correspondence should be reviewed and discussed with legal counsel prior to acting or relying on these materials.