IRS Raises 2026 Health FSA Contribution Limit to $3,400

The IRS increased the health FSA contribution limit to $3,400 for plan years beginning January 1, 2026, up from $3,300 in 2025. This $100 increase, announced in Revenue Procedure 2025-32, is now in effect for New York employers whose plan years align with the calendar year. Employers who haven't yet updated their systems and documentation face compliance exposure and may be limiting their employees' tax savings opportunities.

The adjustment affects both traditional health FSAs and Limited Purpose FSAs used alongside Health Savings Accounts for dental and vision expenses. Additionally, the carryover amount—funds employees can roll from one plan year to the next—increased from $660 to $680 for 2026.

Immediate Compliance Requirements for New York Employers

Employers must update plan documents to reflect the new $3,400 limit. Plans that haven't been amended risk operating outside their documented terms, creating potential fiduciary liability. The IRS requires that contribution limits exceeding $3,400 lose their tax-advantaged status and be treated as taxable wages, triggering additional payroll tax obligations for both employer and employee.

Payroll systems require adjustment to accommodate the higher contribution limits. Many employers discover this requirement only when employees attempt to increase their elections mid-year, creating administrative complications. Systems that cap contributions at the old $3,300 limit prevent employees from maximizing their tax savings and may generate employee relations issues.

For employers offering both FSAs and HSAs, the coordination becomes more complex. Limited Purpose FSAs, restricted to dental and vision expenses when paired with HSAs, are subject to the same $3,400 limit. However, employees contributing to HSAs face different rules and contribution limits that didn't change for 2026.

Cost and Administrative Considerations

The higher contribution limit affects employer cash flow through the uniform coverage rule. FSAs must provide the full annual election amount from the first day of the plan year, regardless of how much the employee has contributed. With employees potentially electing $100 more annually, employers face increased exposure to unreimbursed claims if employees terminate early in the year.

New York employers should evaluate whether their current FSA administration can handle the increased volume and complexity. Higher contribution limits typically drive increased participation and claim volume. Employers reviewing their ancillary benefit offerings often discover that outdated administration creates bottlenecks that reduce employee satisfaction and increase internal administrative burden.

The dependent care FSA limit remains unchanged at $5,000 per household ($2,500 for married individuals filing separately). This creates a communication challenge, as employees may assume all FSA limits increased proportionally.

New York Market Implications

New York's high cost of healthcare makes FSA participation particularly valuable for employees. The additional $100 in pre-tax savings represents approximately $25-30 in tax savings for employees in typical New York tax brackets, considering federal, state, and payroll taxes. For employers competing for talent in the New York market, maximizing these savings opportunities supports workforce retention efforts.

Employers with locations in multiple states should verify that their plan documents accommodate varying state requirements. New York doesn't impose additional FSA regulations beyond federal requirements, but multi-state employers often discover inconsistencies in their documentation that create compliance gaps.

Operational Action Items

Employers should immediately verify that their payroll systems reflect the new $3,400 limit. Test the system by processing a hypothetical election at the maximum amount to ensure proper handling. Many employers discover system limitations only when employees file complaints about contribution restrictions.

Review current plan documents with legal counsel or benefits advisors to ensure amendments address the new limits. Proper plan documentation protects against fiduciary liability and ensures consistent administration.

Communicate the changes to employees, particularly those who may want to adjust their 2026 elections. While most FSA elections are locked for the plan year, qualifying life events may create opportunities for employees to increase contributions. Clear communication prevents confusion and demonstrates employer attention to employee financial benefits.

For employers approaching their next open enrollment period, incorporate the new limits into benefit education materials. Employees often under-utilize FSAs due to the "use it or lose it" rule, but the higher limits and increased carryover amount ($680) may encourage greater participation.

Planning for Future Changes

The IRS typically announces FSA limit adjustments each fall for the following plan year. Employers benefit from building processes that accommodate annual limit changes rather than treating each adjustment as a unique administrative challenge. This includes establishing relationships with payroll providers and benefits administrators who proactively communicate upcoming changes.

FSA contribution limits have increased modestly but consistently over recent years, reflecting inflation adjustments. Employers should anticipate continued gradual increases and ensure their systems and processes can adapt efficiently.

For New York employers evaluating their benefits strategy, FSA participation rates and utilization provide insights into employee financial pressures and benefits engagement. Higher limits may drive increased participation, but effective communication and administration determine whether employees actually capture the available tax savings.

This content is for informational purposes only and does not constitute legal, tax, or benefits advice. Requirements vary based on employer size, location, and plan structure. Information is current as of 2026-02-05. Employers should consult qualified advisors for guidance on their specific circumstances.