The IRS has announced new inflation-adjusted limits for flexible spending accounts (FSAs) beginning in 2026, giving employees more room to set aside pre-tax dollars for medical and dependent care expenses. These updates, along with a major legislative change from the One Big Beautiful Bill (OBBB) Act, make 2026 an important year for benefit planning. For employees, these changes translate to greater flexibility and potential tax savings. For employers, they mean updated plan limits, new communication needs, and an opportunity to highlight valuable benefits.

What Is a Flexible Spending Account (FSA)?

A Flexible Spending Account (FSA) is a special type of savings account that allows employees to set aside part of their earnings before taxes to pay for qualified expenses. Because the money is contributed pre-tax, participants lower their taxable income and keep more of what they earn.

There are two main types of FSAs: Health FSAs and Dependent Care FSAs. While both accounts provide tax advantages, they serve different purposes. Health FSAs are designed for medical expenses, while Dependent Care FSAs help with childcare or dependent care costs. Together, they offer valuable financial relief for many employees.

Health FSAs: Helping Employees Manage Medical Costs

A Health FSA allows employees to use pre-tax dollars to pay for eligible healthcare expenses that are not covered by insurance. This can include copayments, deductibles, prescription medications, eyeglasses, dental treatments, and other medical supplies. Because contributions are taken out before taxes, employees can save a significant amount on healthcare costs throughout the year.

Health FSAs are especially helpful for employees who expect consistent medical expenses. Even routine care such as dental cleanings, vision exams, or prescriptions can be paid through an FSA, which helps families plan their annual healthcare spending more effectively.

2026 Health FSA Limits and Updates

Starting January 1, 2026, the annual contribution limit for Health FSAs will increase to $3,400, up from $3,300 in 2025. The carryover limit will also rise from $660 to $680, according to IRS Revenue Procedure 2025-32.

This limit applies per employee, not per household. Each spouse in a married couple can contribute up to $3,400 to their own FSA if both have access through their employers. Employers can choose to set a lower limit but cannot exceed the IRS maximum.

The contribution limit applies only to employee salary reduction contributions made on a pre-tax basis. Employer contributions, such as matching funds or flex credits, do not count toward the limit unless employees can choose to receive those funds as taxable income.

Carryovers and the “Use It or Lose It” Rule

Historically, FSAs were subject to the “use it or lose it” rule, meaning any unspent funds at the end of the plan year were forfeited. The IRS now allows two options to give employees more flexibility. Employers may allow participants to carry over up to $680 of unused funds into the following plan year, or they may provide a grace period of up to two months and 15 days to use any remaining funds.

Employers can only choose one of these options, not both. Carryover funds do not count toward the following year’s contribution limit, which helps employees plan more confidently. These provisions make FSAs more attractive because participants are less likely to lose money they have set aside.

Why Employees Use Health FSAs

Health FSAs continue to be one of the most popular benefits among employees because they offer clear, practical advantages. Contributions are made pre-tax, reducing taxable income and increasing take-home pay. The account also helps employees budget for medical expenses by spreading costs evenly throughout the year. In addition, the full annual election amount is available at the beginning of the plan year, allowing employees to cover large expenses right away and pay them off gradually through payroll deductions.

Dependent Care FSAs: Supporting Working Families

A Dependent Care FSA, also known as a Dependent Care Assistance Program (DCAP), helps employees pay for childcare or dependent care expenses using pre-tax dollars. These accounts can be used for expenses such as daycare, preschool, before- and after-school programs, summer day camps, or care for a disabled spouse or adult dependent who cannot care for themselves.

Dependent Care FSAs provide a valuable financial benefit to working parents and caregivers who rely on consistent care in order to stay employed. By paying for care with pre-tax dollars, employees can save hundreds or even thousands of dollars each year.

2026 Dependent Care FSA Limit Increase

Effective January 1, 2026, the One Big Beautiful Bill (OBBB) Act will increase the maximum annual contribution limit for Dependent Care FSAs from $5,000 to $7,500 for single individuals and married couples filing jointly, or $3,750 for married individuals filing separately.

This is the first permanent increase since 1986, aside from a temporary pandemic-related change. The new limit is not indexed for inflation, which means it will stay the same until Congress updates it again. This long-overdue change recognizes the rising costs of childcare and dependent care and helps working families better manage those expenses.

Why Employees Use Dependent Care FSAs

Dependent Care FSAs are popular because they help working parents and caregivers reduce the financial strain of care-related expenses. These accounts allow employees to pay for eligible services with pre-tax dollars, saving money while ensuring their loved ones receive the care they need.

To qualify for tax-free reimbursement, the care must be provided for a qualifying individual, such as a dependent under age 13 or an adult dependent who cannot care for themselves. The expenses must also enable the employee and their spouse, if applicable, to work or actively look for work. This program not only provides financial relief but also supports work-life balance for families.

Summary

Beginning in 2026, employees will be able to contribute up to $3,400 to a Health FSA, with up to $680 eligible to carry over, and up to $7,500 to a Dependent Care FSA (or $3,750 if married filing separately). These changes provide meaningful tax savings and more flexibility for employees, while helping employers strengthen their benefits programs.

As healthcare and childcare costs continue to rise, FSAs remain one of the most effective ways for employees to manage expenses and for employers to show their commitment to employee wellbeing. The new limits reflect both inflation and a growing recognition of how critical these programs are for working families.