How FSA Carryover Works: Limits, Grace Periods, and HSA Impact

If your employer’s health Flexible Spending Account includes a carryover provision, the FSA carryover rules let you roll up to $680 of unused funds from a plan year beginning in 2026 into the following plan year, instead of forfeiting them under the usual use-it-or-lose-it default.¹ Your employer decides whether the plan uses a carryover, a grace period, or neither, and the two options cannot coexist in the same plan.²

Why Carryover Exists

Health FSAs are generally use-it-or-lose-it accounts. Any money left in your account when the plan year ends goes to your employer, not back to you.³ Because FSA contributions skip federal income tax and payroll taxes, the IRS keeps a limit on how long those pre-tax dollars can sit unused.

Carryover softens that rule. It was created by IRS Notice 2013-71, which gave employers permission to let a limited amount of leftover money follow you into the next plan year.² If your employer chose neither carryover nor a grace period, the full forfeiture rule still applies with no relief.

How Much You Can Carry Over

For plan years beginning in 2026, the maximum health FSA carryover is $680.¹ The IRS adjusts the figure each year for inflation, so it tends to move up modestly. Employers are free to set a lower cap in the plan document, but they cannot exceed the IRS limit.

The mechanics are straightforward. If you have more than $680 left over at the end of the plan year, only $680 rolls forward and the rest is forfeited. If you have $680 or less remaining, the whole balance carries over and nothing is lost. Once the money crosses into the new plan year, you can spend it on any eligible medical expense incurred during that year.

Carryover Does Not Reduce Your New Election

A carried-over balance is stacked on top of your new contributions, not subtracted from them. The 2026 health FSA salary reduction limit is $3,400.¹ If you carry over $680 and elect the full $3,400 for the new year, you have $4,080 available.²

Carryover or Grace Period, Not Both

The grace period is the alternative relief option an employer can adopt. It gives you up to two months and 15 days after the plan year ends to keep incurring eligible expenses against your prior-year balance.³ For a calendar-year plan, that runs through March 15.⁴ There is no dollar cap on how much of the remaining balance you can spend during the grace window, but anything still unused when it closes is forfeited.

You do not choose between these. Your employer’s plan document controls which one applies, if either. The trade-offs look like this:

The grace period lets you access your entire remaining balance with no dollar cap. Carryover is limited to $680 for 2026, and anything above that is forfeited.
The grace period gives you about 10 extra weeks to incur expenses. Carried-over funds stay usable for the full next plan year.
If you cannot generate enough expenses during a grace period, you lose whatever is left. Carryover funds are safer for moderate leftover balances because they sit in your account for 12 more months.

For a small routine leftover, carryover tends to be the safer structure. For someone with a large unspent balance and predictable early-year medical costs, the grace period offers more room to recover funds.

Do Not Confuse Carryover With the Run-Out Period

Every FSA has a run-out period, and it is not the same as either carryover or a grace period. The run-out period is a window after the plan year ends, often around 90 days, during which you can submit claims for reimbursement. It only covers expenses you already incurred during the plan year. You are turning in paperwork, not spending on new services.

A dental visit on December 20 that you did not submit before year-end can still be reimbursed if you file the claim in January or February within the run-out window. Run-out periods exist regardless of whether the plan also offers carryover or a grace period.

Dependent Care FSAs Do Not Get Carryover

The carryover rules described here apply to health FSAs. Dependent care FSAs, which reimburse child care and similar expenses, do not offer a carryover provision.⁵ A temporary COVID-era carryover for plan years ending in 2020 and 2021 has expired. The only remaining safety valve for a dependent care FSA is the grace period of up to two and a half months, and only if the employer’s plan includes it.

Carryover and HSA Eligibility

If you are thinking about moving to a high-deductible health plan and opening a Health Savings Account, a health FSA carryover creates a problem. Any general-purpose health FSA balance carried into the new plan year blocks HSA eligibility for that entire year.³ The IRS treats you as having other health coverage that disqualifies HSA contributions, even if the carried-over amount is only a few dollars.

The usual workaround is a limited-purpose FSA. It restricts reimbursements to dental and vision expenses, so it does not conflict with HSA eligibility.³ Some employers automatically convert a general-purpose carryover balance to a limited-purpose FSA when a participant switches to HDHP coverage. Ask your benefits administrator whether yours does this before open enrollment. If the plan does not convert automatically, you may need to spend the FSA down to zero before the plan year ends to keep HSA contributions on the table.

Your Carryover When You Leave the Job

Health FSA participation typically ends on your last day of employment. You can still submit claims during the run-out period, but only for expenses incurred while you were an active participant.⁶ Anything not spent before your separation date is at risk.

Your employer may be required to offer COBRA continuation coverage for the health FSA. Electing COBRA lets you keep incurring new eligible expenses through the end of the plan year. COBRA premiums for any health benefit, including an FSA, cannot exceed 102 percent of the cost to the plan.⁷ Without COBRA, the carryover mechanism generally cannot help you after separation because it requires you to be an active participant in the next plan year to use the rolled-over funds.

1
Internal Revenue Service. Revenue Procedure 2025-19
2
Internal Revenue Service. Notice 2013-71, Modification of Use-or-Lose Rule for Health Flexible Spending Arrangements
3
Internal Revenue Service. Publication 969 (2025), Health Savings Accounts and Other Tax-Favored Health Plans
4
Internal Revenue Service. IRS – Eligible Employees Can Use Tax-Free Dollars for Medical Expenses
5
FSAFEDS. FAQs – Dependent Care FSA Carryover
6
FSAFEDS. FAQs – Most Popular Questions
7
U.S. Department of Labor. An Employees Guide to Health Benefits Under COBRA