New IRS Changes to FSA Contribution Limits for 2026: What to Know

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Do you have or are you thinking about opening a Flexible Spending Account (FSA)? Here’s a potentially good reason to consider it. The IRS recently raised the limits on tax-advantaged healthcare and dependent care contributions.

With an FSA, employees can make payroll deposits into their accounts to build a cushion to pay insurance deductibles or pay for qualifying medical expenses, or other items not covered by insurance.

Deposits are made with pre-tax dollars, before any federal or state income taxes, Social Security taxes, or Medicare taxes are withheld from your paycheck. That means your FSA deposits are not included in your taxable income. In other words, it’s essentially “tax-free.”

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What’s an FSA and what’s so great about it?

FSAs are employer-sponsored savings accounts that allow employees to set aside money from their paychecks, before taxes, to pay for healthcare and health-related dependent care expenses.

This tax-free money establishes a revolving, self-replenishing fund from which an employee can pay insurance deductibles, copays, and other qualified medical expenses.

Qualifying FSA expenses include, but are not limited to:

Prescription medications and most over-the-counter medications (like cough remedies)
Medical equipment and supplies, like monitoring devices (e.g., CPAPs), canes, hearing aids, first aid, and emergency care
Denture and orthodontic care, like adhesives, retainers, and dental treatments like fillings and crowns
Prescription eyeglasses and contact lenses, including over-the-counter contact lens care and maintenance supplies.

FSA downsides to watch out for

Having access to tax-free money to pay healthcare bills can be great, but it’s a good practice to keep tabs on how much you’re putting into your account.

As mentioned, the IRS has announced higher contribution limits for next year (2026): $3,400, up from $3,300 in 2025.

But if you contribute more than the FSA threshold to your account ($3,400 for 2026), your deposits lose their tax advantage and will be taxed as wages at your applicable income tax rate.

The fact that FSA deposits are made through your employer’s payroll system can act as a brake of sorts on the amounts you’re contributing.

Another reason to monitor your FSA balance is that if you don’t spend all the money in your FSA by your health plan’s year-end, the balance will be forfeited to your employer. That’s pretty harsh.

Employers may allow employees a grace period after the plan year’s end to spend the funds, or allow the employee to roll over a certain amount (up to $680 for 2026) to the following plan year.
But an employer isn’t required to provide that relief.
And if an employee leaves the company, the money in their FSA account stays with the employer. That's because under IRS rules, the account belongs to the employer, not the employee.

In either case, it’s in your best interest to exhaust all your FSA account funds before the plan year ends or before you leave the company.

Is an FSA right for me?

It depends. Employers may elect to offer FSAs to employees in addition to their standard benefits package, but it’s not a requirement. In addition, only employers can sponsor FSAs, so if you’re self-employed, you’re out of luck. (There are alternatives for you, but they’re governed by different rules.)

However, FSAs can be good for people with ongoing routine medical expenses — prescription and non-prescription drugs, glasses, contact lenses, and products for their maintenance, denture and orthodontic care products, and other dental treatments.

Dependent care FSA limit 2026

Employees with child or adult dependents who require care so the employee can work can open a dependent care FSA in addition to a healthcare FSA (these are separate accounts under IRS rules).

And some good news: The dependent care FSA limit is significantly increasing for 2026.

For 2026, the maximum dependent care tax-free contribution is $7,500, up from $5,000 in 2025. Eligible expenses include:

Childcare (day care, pre- and after-school care)
Summer camps (not overnight)
Babysitters or nannies (work-related)
Adult day care for a dependent parent or spouse

Not FSA-eligible? Consider an HSA

Under IRS rules, FSAs can only be sponsored by employers as part of an employee’s health benefits package, and in fact, the account belongs to the employer. So, individuals who aren’t employed are ineligible for an FSA.

But the self-employed and others aren’t left in the cold when it comes to a tax-advantaged savings account. They can open a health savings account (HSA), with all the tax benefits of an FSA and more, provided they meet a key requirement: they must be enrolled in a qualifying high-deductible health plan (HDHP).

However, HSAs come with their own contribution limits and pros and cons. For more information, see Kiplinger’s report: An HSA Sounds Great for Taxes: Here’s Why It Might Not Be Right for You.

Roxanne Bland, a self-styled “tax nerd,” has worked in the tax field for over 30 years as a state tax legal analyst. Before joining Kiplinger as a tax writer to help ordinary people make sense of their federal and state tax obligations, Roxanne spent many years covering developments in state tax jurisprudence at the U.S. Supreme Court and worked closely with state revenue agencies to develop uniform tax legislation. She has also contributed to Tax Notes State, a Tax Analysts publication focusing on cutting-edge corporate tax issues.