Workers who set aside pretax dollars in a health flexible spending account face a hard deadline: spend the money on eligible medical expenses before the plan year ends or risk losing it entirely. The IRS has allowed employers to soften that blow with an optional carryover provision, but the carryover cap keeps shifting with inflation. For plan years beginning in 2026, the maximum a worker can roll forward is $680, up from the original $500 threshold, while the annual salary-reduction limit rises to $3,400. The gap between those two numbers means that anyone who overestimates their medical spending could still forfeit well over $2,700 in a single year.
How the FSA Carryover Cap Reached $680
The use-it-or-lose-it rule existed for decades before the Treasury Department announced a modification, allowing employers to let participants carry over up to $500 of unused health FSA balances into the following plan year, according to a Treasury announcement. That change, rooted in IRS Notice 2013-71, was optional for employers and came with a catch: a plan cannot offer both a carryover and a grace period. Employers had to pick one safety valve or offer neither.
Since then, the IRS has adjusted the carryover ceiling for inflation each year. Revenue Procedure 2025-32, published in Internal Revenue Bulletin 2025-45, sets the 2026 health FSA salary-reduction limit at $3,400 and caps any permitted carryover at $680. That $680 figure represents a 36 percent increase over the original $500 threshold, reflecting cumulative cost-of-living adjustments rather than any new policy decision. The salary-reduction limit has climbed in parallel, which means the total amount at risk of forfeiture has grown as well.
A reasonable hypothesis follows from those numbers: employers that adopt the full inflation-adjusted carryover should see measurably lower year-end forfeitures than those that skip the provision altogether, even when employees contribute similar amounts. The logic is straightforward. A $680 cushion gives workers room to miscalculate without losing everything. But the IRS does not publish employer-level adoption rates or aggregate forfeiture data, so the hypothesis remains untested against actual plan outcomes.
What IRS Guidance Does and Does Not Reveal
IRS Publication 969, the agency’s taxpayer-facing guide to health savings accounts and other tax-favored health plans, explains how health FSAs work and cites Rev. Proc. 2024-40 for the 2025 contribution and carryover limits. The publication walks through eligibility rules, qualified expenses, and the distinction between a carryover and a grace period. What it does not include is any data on how many employers actually offer the carryover or how much money participants forfeit each year.
That gap matters because the carryover is entirely at the employer’s discretion. A company can choose to offer no carryover at all, leaving workers fully exposed to the use-it-or-lose-it rule. Another employer might offer a carryover but cap it below the IRS maximum. Without published adoption statistics, workers have no way to benchmark their own plan’s generosity against the broader market.
The conflict between the original $500 carryover and the higher contribution ceiling has only widened as inflation adjustments accumulate. When the carryover was first introduced, the salary-reduction limit and the carryover amount were relatively close, so a worker who overshot their needs could still preserve a meaningful share of their balance. Today, the maximum contribution is five times the permitted carryover. That means a worker who contributes the full $3,400 and ends the year with $1,500 unspent can carry only $680 into the next plan year. The remaining $820 is forfeited back to the plan.
The IRS periodically summarizes these adjustments in broader inflation releases. In its tax year 2026 inflation overview, the agency confirms that numerous dollar limits across the tax code are indexed, including those tied to employer health plans. Health FSA carryovers are part of that system, but they occupy a narrow slice of the guidance and receive little narrative explanation beyond the raw numbers.
Why the Data Void Matters for Workers
For individual employees, the absence of adoption and forfeiture data turns FSA planning into guesswork. A worker enrolling during open season can see the IRS limits and their employer’s specific rules, but not how those rules compare with other organizations or what typical forfeiture rates look like. That makes it harder to decide whether to contribute aggressively to capture tax savings or conservatively to avoid losing money.
The lack of transparency also obscures how much unused FSA money flows back to employers. Forfeited funds can be used to offset administrative costs or, in some cases, to enhance benefits, but workers rarely see a clear accounting. If forfeitures are substantial and persistent, that would suggest the current carryover cap and employer plan designs are not aligning with employees’ real-world medical spending patterns.
Without official statistics, researchers and policymakers have limited tools to evaluate whether the $680 cap is adequate. A higher carryover might encourage more participation and reduce forfeitures, but it could also increase employer costs or complicate plan administration. Conversely, keeping the cap low preserves the traditional use-it-or-lose-it discipline, which some employers view as a guardrail against treating FSAs as long-term savings vehicles.
What Workers Can Do Now
In the absence of better data, workers have to focus on the levers they can control. That starts with reading plan documents carefully to confirm whether a carryover is available, what the exact cap is, and whether any grace period applies instead. Employees can then calibrate their contributions based on predictable expenses-such as ongoing prescriptions, regular therapy visits, or known procedures-rather than aspirational guesses.
As inflation pushes both contribution limits and the carryover cap higher, the stakes of miscalculating grow. Until the IRS or other institutions shed more light on how often workers actually lose money under the current rules, the safest course is cautious enrollment, careful recordkeeping, and proactive use of FSA funds well before the plan year ends.
