An FSA, or flexible spending account, is an employer-sponsored account that lets employees set aside pre-tax pay for eligible health care expenses. The 2026 health FSA limit is $3,400, and unused money is generally forfeited at year end unless the plan offers a carryover of up to $680 or a grace period.
Key takeaways
- FSAs are offered through a Section 125 cafeteria plan, and contributions skip income tax and FICA.
- The full annual election is available from the first day of the plan year.
- Plans can offer a carryover or a grace period, but not both.
- A general-purpose health FSA makes the employee ineligible to contribute to an HSA.
How FSA works
During open enrollment, an employee chooses how much to put into the FSA for the year, up to $3,400 in 2026 (Davis Wright Tremaine, IRS 2026 benefit plan limits). Payroll deducts an equal amount each pay period before taxes. When the employee has an eligible expense, such as a deductible, copay, prescription, glasses, or dental work, they submit a claim or use an FSA debit card.
Health FSAs follow the uniform coverage rule: the whole annual election is available on day one. An employee who elects $2,400 can spend $2,000 in January even though only $100 has been deducted. If they leave in February, they keep what they spent, and the employer absorbs the difference. The flip side is forfeiture: money not spent by the deadline goes back to the employer, unless the plan allows a carryover of up to $680 into 2027 or a grace period of up to two and a half months (IRS Publication 969, HSAs and other tax-favored health plans).
Elections are locked for the year unless the employee has a qualifying life event.
FSA example
A customer success lead expects $1,800 in orthodontic and prescription costs next year and elects $1,800. Paid semi-monthly, $75 comes out of each of 24 paychecks before tax.
At a 22% federal bracket and 7.65% FICA, she saves about $534 in taxes. If she ends the year having spent $1,600, her plan's carryover lets her move the remaining $200 into the next year. Without a carryover or grace period, she'd forfeit it.
Why FSA matters for employers
FSAs give employees a tax break on costs they would pay anyway, and they cost employers little beyond administration. Employers also save FICA on every dollar employees contribute. The uniform coverage rule is a small risk, but forfeitures from other participants usually offset it.
The bigger risk is compliance. FSAs must pass nondiscrimination testing so that benefits don't favor highly compensated employees, and the plan needs a written document. Communication matters too: clear reminders before the spending deadline reduce forfeitures and complaints. Our open enrollment reminder email is a good place to explain carryover rules.
Common FSA mistakes to avoid
Offering both carryover and grace period
A plan can have one or the other, not both.
Pairing a general FSA with an HSA plan
Use a limited-purpose FSA for dental and vision so employees stay HSA-eligible.
Allowing mid-year changes without a qualifying event
Section 125 elections are irrevocable for the plan year except for permitted events.
Skipping nondiscrimination testing
Failing tests can make benefits for highly compensated employees taxable.
FSA: questions people also ask
What is the FSA limit for 2026?
What happens to unused FSA money?
Can I use FSA money before it's deducted from my pay?
What can an FSA be used for?
Can I have an FSA and an HSA?
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HRTally glossary entries are written by people who have run US payroll, benefits, and HR operations, then checked line by line against primary sources such as the IRS, Department of Labor, EEOC, and Bureau of Labor Statistics. Dollar limits and rates are for 2026 unless stated. We review every entry at least twice a year and whenever a rule changes. This page explains general rules and isn't legal or tax advice; state law can differ. Read our editorial standards.
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<blockquote>An FSA, or flexible spending account, is an employer-sponsored account that lets employees set aside pre-tax pay for eligible health care expenses. The 2026 health FSA limit is $3,400, and unused money is generally forfeited at year end unless the plan offers a carryover of up to $680 or a grace period.</blockquote><p>Source: <a href="https://www.hrtally.com/hr-glossary/fsa/">HRTally HR Glossary, FSA</a></p>
Written by the HRTally Research Team
Our guides are written and reviewed by people with hands-on US HR, payroll, and HR technology experience. Legal and tax facts are checked against primary sources, such as the Department of Labor, IRS, EEOC, and USCIS, and linked at the end of each guide. Vendors never review or pay for our editorial content.