Workers who set aside pretax dollars in a health flexible spending account face a hard deadline: spend the money on eligible expenses before the plan year closes or lose it. For plan years beginning in 2026, the IRS has capped salary-reduction contributions at $3,400, raising the ceiling and, with it, the amount that could vanish if left unspent.
The $3,400 Cap and the Forfeiture Clock for 2026
Health FSAs operate under what the IRS calls the “use-or-lose” rule. Contributions that employees elect through their employer’s cafeteria plan must be used for qualified medical expenses within the plan year, or the remaining balance reverts to the employer. The statutory framework sits in Section 125 of the tax code, which governs cafeteria plans and sets the legal boundaries for these accounts.
For 2026, the annual contribution limit rises to $3,400. The IRS spelled this out in its employer guidance: a cafeteria plan “may not allow an employee to request salary reduction contributions for a health FSA in excess of $3,400,” according to Publication 15-B. That figure was part of a broader package of inflation adjustments the agency announced for fringe benefits and pretax arrangements. A higher cap means employees can shelter more income from taxes, but it also means a larger sum is at risk of forfeiture if spending falls short.
Because FSAs are employer-sponsored, workers typically learn about the limit and the use-or-lose rule during open enrollment. Yet the forfeiture clock is built into the plan’s structure: unless the employer adopts one of two permitted flexibilities, any dollars left on December 31 (or the end of the plan year) are simply lost. The IRS reiterates this basic framework in its general tax guidance for employee benefit plans, leaving employers to decide how much protection to offer against forfeiture.
Carryover vs. Grace Period: Two Partial Shields Against Forfeiture
Before 2013, the use-or-lose rule was close to absolute. Employers could offer a 2.5‑month grace period after the plan year ended, but any balance remaining after that window was gone. The U.S. Department of the Treasury changed the equation with Notice 2013‑71, which allowed plans to let participants carry over a limited amount of unused FSA funds into the following year. The Treasury announcement described the move as a modification of the longstanding use-or-lose framework, intended to reduce wasteful end‑of‑year spending and unexpected losses.
The two options are mutually exclusive. An employer’s plan can adopt either the carryover provision or the grace period, but not both. Plans that choose the carryover let workers roll a capped amount into the next year without a new spending deadline attached to that portion, while grace‑period plans extend the clock by roughly ten weeks but still forfeit anything left over after that. Neither option eliminates forfeiture entirely. They simply narrow the portion of the balance that is exposed to the deadline.
The carryover approach removes much of the time pressure that causes many workers to scramble for last‑minute purchases or lose funds they intended to use but failed to track. A grace period, by contrast, still requires spending within a fixed extension and can be easy to overlook. This structural difference suggests that plans using the carryover will see fewer dollars forfeited at year‑end, though no public IRS dataset currently tracks aggregate forfeiture rates broken out by plan design.
What Workers Still Cannot Know About FSA Forfeiture Rates
Several gaps in the public record limit how precisely anyone can measure the real‑world impact of the $3,400 cap. The IRS does not publish participant‑level data on how much money is forfeited each year from health FSAs, nor does it release statistics comparing forfeitures in carryover plans versus grace‑period plans. Employers see their own plan data, but that information generally remains confidential and is not aggregated into a national picture.
Even basic questions remain unanswered for consumers. There is no official estimate of what share of FSA participants forfeit funds in a typical year, how much is lost on average, or whether higher contribution limits correlate with higher forfeiture rates. Publicly available IRS communications, including its regularly updated newsroom highlights, focus on announcing new limits and technical rules rather than reporting outcomes for workers.
That lack of transparency makes it difficult for employees to gauge the real risk of electing the maximum $3,400. A worker deciding how much to contribute must rely on personal budgeting, past medical expenses, and whatever limited guidance an employer or benefits administrator provides. Without data on typical forfeiture patterns, it is impossible to know whether most participants successfully use nearly all of their balances or whether significant sums are routinely left behind.
The policy trade‑off is clear. Raising the cap expands the tax advantage for those who can predict and use their health spending, but it also increases the potential loss for anyone who overestimates. Until regulators or researchers publish more detailed forfeiture statistics, the use‑or‑lose rule will remain a largely opaque feature of the FSA system-one that workers must navigate with imperfect information even as the stakes climb with each new increase in the contribution limit.
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Warren Cohen is a finance writer based in Phoenix, Arizona, covering personal finance topics including credit, banking, and beginner investing. He earned his degree in business administration from Arizona State University and began his career working in consumer finance, where he gained direct experience with lending and credit systems. He now writes for personal finance websites and fintech platforms, focusing on clear, practical content that helps readers make informed financial decisions.
