Quick Facts
- On November 5, 2026, the Internal Revenue Service (IRS) released IRS Revenue Procedure 2026-35 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. These limits are set by statute and not adjusted annually for inflation.
Background
In Revenue Procedure 2026-35, the IRS sets forth a variety of 2027 adjusted tax limits. Among other things, the notice indicates that employee contribution limits toward health FSAs and qualified transportation fringe benefits will increase for 2027. The limit on annual employee contributions toward health FSAs is $3,500 in 2027, with the ability to carryover up to $700. The limit on monthly contributions toward qualified transportation and parking benefits for 2027 is $350.
Health Flexible Spending Arrangements (FSAs)
The 2027 annual contribution limit of $3,500 for health FSAs applies to employee contributions. The same limit applies for 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 $3,500 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 up to $700 in 2027 even if they’ve carried over up to $680 from the 2026 plan year. In addition, employees who join mid-plan year may still elect up to $3,500 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 $3,500 for 2027. 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 $3,500 under each employer’s health FSA.
Employer Health FSA Contributions
Employer contributions may be made in addition to the $3,500 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 $3,500 for 2027), 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 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 $700 (for 2027), but not both.
Qualified Transportation Fringe Benefits (Transportation & Parking)
Instead of annual contribution limits, qualified transportation fringe benefits are subject to monthly limits. The 2027 monthly limit of $350 applies separately to:
- Qualified parking
- The combination of commuter highway vehicles and transit passes
An employee could elect up to $350/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 $350 in any given month.
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