The IRS Raised the 2027 Health FSA Limit to $3,500 With a $700 Carryover as Workplace Open Enrollment Elections Come Due

Benefits season is the one stretch of the year when an employee is asked to guess what next year’s medical bills will look like. The IRS just changed one of the numbers that guess has to fit under: the most a worker can set aside in a health flexible spending arrangement for 2027 is $3,500, and the most a plan can let someone carry into the following year is $700.

Both figures come from the IRS’s annual inflation adjustments, announced Nov. 5, 2026 as IR-2026-133. The details sit in Revenue Procedure 2026-35, which covers almost 70 provisions. The health FSA limit is up $100 and the carryover ceiling is up $20 from the current year.

What a health FSA is, and who can open one

A health FSA is a benefit an employer sets up, often inside a cafeteria plan, that reimburses an employee for medical costs. According to IRS Publication 969, these accounts are usually funded through voluntary salary reduction agreements with the employer, so the money comes out of pay before federal income and employment taxes. Self-employed people are not eligible, because the account runs through an employer’s plan.

The publication says qualified expenses are the ones the plan specifies that would generally count for the medical and dental expense deduction. That covers the account holder, a spouse, dependents and a child under age 27. Over-the-counter medicine and menstrual care products are included. Health insurance premiums and long-term care costs are not, and neither are expenses another health plan already pays.

The $3,500 cap and the $700 carryover

For plan years that begin in 2027, the IRS sets the salary-reduction limit at $3,500, according to the revenue procedure’s section on Internal Revenue Code Section 125(i). The IRS release lists the carryover ceiling as $700 for plans that allow carryovers. That condition matters. The $700 is the most the law permits, not something every employer offers.

Publication 969 explains that a plan may set a lower carryover limit than the maximum, and that a plan with a carryover cannot also offer a grace period of up to two and a half months to spend the prior year’s balance. An employer picks one option, the other, or neither. Anyone choosing an election amount has to look at the plan document, not just the federal ceiling.

The federal limit applies to an employee’s own salary reductions. The Tax Foundation notes that the IRS adjusts more than 60 provisions each year using the chained consumer price index, and expects the adjusted parameters to rise about 3.2% on average for 2027. The FSA bump is part of that sweep rather than a new benefit.

Why the election date matters more than the cap

Publication 969 states that an employee generally designates a contribution amount at the start of the plan year and can change or revoke it only if the law and the plan specifically allow it. For employees whose plan years begin Jan. 1, that makes the choice made during workplace open enrollment the one that sticks. The same publication notes that an FSA cannot make advance reimbursements for future or projected expenses.

Because unspent money is limited to a carryover or a grace period, depending on what the employer chose, the practical question for a household is which expenses are close to certain: recurring prescriptions, glasses, dental work already planned, copayments for ongoing treatment. The IRS does not say how much a worker should elect. It sets the ceiling and the rules around it.

Commuter benefits rise alongside it

The same release raises the monthly limit on employer-provided transit passes and qualified parking to $350, up $10, according to the IRS. IRS Publication 15-B lists the current limit as $340 a month for each category. Like the health FSA, these are employer programs, so a worker only benefits if the employer offers the benefit.

Other health-related figures in the release include higher deductible ranges for Archer Medical Savings Accounts. For self-only coverage, the IRS lists a minimum annual deductible of $3,000 and a maximum of $4,550, with a $6,050 out-of-pocket maximum. For family coverage, the range is $6,050 to $9,050, with an $11,050 out-of-pocket limit.

What stays the same

The 2027 limit is a ceiling on one tool, not a forecast of anyone’s medical spending. A worker whose employer caps FSA contributions below $3,500 is held to the lower employer number, and a worker whose plan has no carryover or grace period still faces a year-end deadline for claims. The relevant document is the summary plan description from human resources, which spells out the plan year, the covered items and the claim deadline.

None of the 2027 figures change what a health FSA is. The money still has to be used for qualified medical expenses under the plan’s rules, and it still depends on the employer sponsoring the plan. The IRS said the adjustments generally apply to tax years beginning in 2027, so they do not alter anything for the current plan year.

The IRS framed the release as part of what it calls the Working Families Tax Cuts, quoting Chief Executive Officer Frank J. Bisignano as saying, “Hardworking American taxpayers will continue to benefit from the Working Families Tax Cuts.” For benefits elections, the narrower point is the one that counts: the ceiling is $3,500, the carryover maximum is $700, and the employer’s plan decides how much of that room a worker really has.

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This article was produced with AI assistance and edited for accuracy against the sources linked above.

Image: Jim Evans – CC BY-SA 3.0/Wikimedia Commons