Tax savings from a health FSA, and how much to elect without losing money
Updated October 2026
| Limit | 2025 | 2026 |
|---|---|---|
| Employee salary-reduction limit | $3,300 | $3,400 |
| Maximum carryover (if the plan allows) | $660 | $680 |
| Grace period (alternative to carryover) | Up to 2½ months after the plan year | |
The IRS set the 2026 figures in Revenue Procedure 2025-32 (October 9, 2025). The 2027 limit had not been announced as of October 22, 2026; it normally appears in the IRS inflation-adjustment release in October or November, in time for open enrollment. The limit applies per employee, so spouses with FSAs at their own jobs can each elect $3,400.
Savings = election × (federal bracket + state rate + FICA rate). Money lost = election − expenses − any carryover allowed (zero under a grace period if you spend the rest in time). Net benefit = savings − money lost.
Worked example (default). Election $2,500; combined rate 22% + 5% + 7.65% = 34.65%; savings $2,500 × 0.3465 = $866.25. Expenses come to $2,200, leaving $300. Under a carryover plan, $300 is within the $680 limit and moves to 2027: net $866.25. Under a strict plan, the $300 is forfeited: net $566.25. Each dollar elected beyond what you spend saves 34.65 cents but loses a dollar, so with no carryover the election should match expected costs.
Election: the yearly amount you choose at open enrollment, taken evenly from each paycheck. Expected expenses: deductibles, copays and coinsurance, prescriptions, dental and orthodontia, eye exams, glasses and contacts, and over-the-counter medicines and menstrual products (eligible without a prescription since 2020). Federal bracket: the top rate on your last return. FICA: 7.65% unless your wages are above the Social Security wage base ($184,500 in 2026), where only the 1.45% Medicare tax applies. For 2027 the Social Security wage base rises to $192,300 (Social Security Administration, announced October 14, 2026). Plan rule: your benefits guide or summary plan description says whether the plan has a carryover, a grace period, or neither.
| Situation | Election | Spent | Plan rule | Tax saved | Forfeited | Net benefit |
|---|---|---|---|---|---|---|
| Glasses and copays, 12% bracket, no state tax | $1,000 | $1,000 | Neither | $196.50 | $0.00 | $196.50 |
| Default, carryover plan | $2,500 | $2,200 | Carryover | $866.25 | $0.00 | $866.25 |
| Default, use-it-or-lose-it plan | $2,500 | $2,200 | Neither | $866.25 | $300.00 | $566.25 |
| Maximum election, braces planned | $3,400 | $3,300 | Neither | $1,246.10 | $100.00 | $1,146.10 |
| Maximum election, spends $2,500, carryover | $3,400 | $2,500 | Carryover | $1,144.10 | $220.00 | $924.10 |
| High earner over the wage base | $3,400 | $3,400 | Grace period | $1,443.30 | $0.00 | $1,443.30 |
In the fifth row $900 is left over; $680 carries over and $220 is lost. The high earner saves the most per dollar despite paying almost no FICA, because federal and state rates are higher.
Carryover or grace period, not both. A plan can let up to $680 of unused 2026 money roll into 2027, or give until March 15, 2027 to incur new expenses, or offer neither. Run-out period. Separate from both, most plans give a few months after year-end to submit claims for expenses already incurred. Uniform coverage. Your full annual election is available from the first day of the plan year, even before you have contributed it. Changes. Elections are fixed for the year unless you have a qualifying event such as marriage, birth or a change in coverage. HSA conflict. A general health FSA makes you ineligible to contribute to an HSA; a limited-purpose FSA for dental and vision does not.
It does not include employer FSA contributions, does not model a limited-purpose FSA alongside an HSA, and assumes your state exempts FSA contributions (a few do not fully). Lower FICA wages can very slightly reduce future Social Security benefits, which is ignored. It cannot tell you whether a specific item is eligible; your plan administrator decides that, and some items need a doctor’s letter of medical necessity. If you expect to leave your job mid-year, ask HR how uniform coverage and COBRA continuation apply to your account.
Electing for hoped-for expenses. Base the election on costs you are sure of, then add the carryover amount only if your plan has one. Missing the claim deadline. Expenses incurred in the year still need a claim filed within the run-out period. Buying ineligible items in December. Cosmetic procedures, gym memberships and general wellness products do not qualify. Forgetting both spouses’ limits. A couple can shelter up to $6,800 through two employers. Combining with an HSA. A spouse’s general FSA that covers you blocks your HSA contributions.