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The Internal Revenue Service said November 5 that employees will be able to set aside up to $3,500 in a health flexible spending account for plan years beginning in 2027, a $100 increase over the $3,400 allowed this year (IR-2026-133). The same announcement raised the most a plan may let workers carry into the following year to $700, from $680. Neither change to the health FSA limit matters much to someone whose plan year ends December 31 and who has not yet spent the 2026 balance, because the standing rule is that whatever remains goes back to the employer.
The health FSA limit for 2027, in numbers
The figures appear in Section 3.16 of Revenue Procedure 2026-35. Last year’s, $3,400 and $680, come from Section 4.15 of Revenue Procedure 2025-32. They are ceilings, and an employer can choose a lower health FSA limit for its own plan or skip the carryover altogether, since offering one is optional.
How the forfeiture rule works
Under a health FSA, employees direct part of their pay, before income and payroll taxes, into an account that reimburses medical costs. The arrangement carries a condition spelled out in Notice 2013-71, which describes a rule requiring that unused benefits or contributions remaining at the end of the plan year be forfeited. Employers may soften the rule in one of two ways, and a plan cannot use both in the same year.
A carryover lets the plan move unused money into the next year, up to the IRS maximum ($680 on the 2026 figures, $700 on the 2027 ones) or a lower amount the plan sets, and what is carried over does not count against the next year’s salary-reduction limit. A grace period instead gives participants a stretch of time after the year ends to keep incurring expenses against the old balance. Publication 15-B says an employer may amend the plan to allow carryover instead of a grace period, so a worker has to look at the plan document to learn which, if either, applies.
What forfeiting costs, by tax bracket
The cost of losing money under any health FSA limit depends on how much tax the contribution saved. Contributions generally avoid the 7.65 percent Social Security and Medicare payroll tax on wages below the Social Security wage base, in addition to federal income tax. For a worker in the 22 percent bracket, ignoring state tax, each dollar contributed saves 29.65 cents. At 12 percent the saving is 19.65 cents, and at 24 percent it is 31.65 cents. A $1,000 election therefore saves $196.50, $296.50 or $316.50 depending on the bracket; a $2,000 election saves $393, $593 or $633; and an election at the $3,500 health FSA limit saves $687.75, $1,037.75 or $1,107.75.
Those savings set the break-even. In the 22 percent bracket, a worker who elects $2,000 and forfeits $700 has saved $593 in tax and lost $700 in pay, for a net loss of about $107. Forfeit more than 29.65 percent of the amount contributed and the account has cost more than it saved. A worker who spends the full $2,000 ends up $593 ahead. These figures are our illustration rather than tax advice, since state tax, bracket and plan terms will change the result.
A worked example
Take a worker whose plan year ends December 31 and who elected $2,400 for 2026, well under the $3,400 health FSA limit, but has claimed only $1,500 so far. The $900 left is more than a third of the election. At the 22 percent bracket the $2,400 saved $711.60 in tax, so letting the $900 lapse leaves a net loss of $188.40. Spending it on a dental visit or new glasses that were coming anyway turns the same account into a gain of $711.60.
Steps to take before the plan year closes
Three details are in the plan documents: the date the plan year ends, whether the plan offers a carryover or a grace period, and how long participants have after year-end to file claims for expenses already incurred. That last deadline is set by each plan and is not a single IRS date. With those in hand, compare the balance with expected spending for the rest of the year. Leftover money can go toward appointments that were being postponed, prescription refills and items the plan lists as eligible. The plan’s own list controls, not a general one, and receipts should be kept in case a claim is questioned.
For 2027, the better target is an amount a household is confident it will spend, not the full health FSA limit. Suppose someone expects two prescriptions at $60 a month plus $360 for glasses. That is $1,800, which saves about $533.70 at the 22 percent bracket, and electing $3,500 would put $1,700 at risk. Most plans fix the election for the full year unless a qualifying life event occurs, a point to confirm with the plan before relying on a mid-year change. Our guide to negotiating a medical bill covers one way to shrink the number, and our year-end tax moves checklist covers other December 31 deadlines.
FSA or HSA
A general-purpose health FSA can stand in the way of a health savings account. Publication 969 says an employee covered by a high-deductible health plan who also has a health FSA that pays or reimburses qualified medical expenses generally cannot contribute to an HSA, while a limited-purpose FSA, which covers items such as preventive care, dental and vision, can sit alongside one. Anyone choosing a plan for 2027 can find the marketplace dates in our guide to ACA enrollment deadlines.
What is not known yet
The IRS sets ceilings and nothing more. Which employers will adopt the $3,500 health FSA limit or the $700 carryover for 2027 is not yet clear, since each plan writes its own terms and many will not publish them until open-enrollment materials go out. Plans that do not run on the calendar year have different deadlines. This article covers health FSAs only; dependent care accounts and HSAs carry separate limits that we did not review.
Editor’s take
The new health FSA limit draws the attention, but a $100 increase mostly helps the small group of workers who already contribute the maximum. For everyone else, the figure to watch is the balance on the latest FSA statement and the date it expires. Spend it on care that was already needed, and elect next year only what can be predicted. A carryover works as a cushion, not a plan.
This article is general information, not tax or financial advice. Plan rules vary, so confirm yours with the benefits administrator.
