Flexible Spending Account (FSA) Explained | CafeHealth
What is Flexible Spending Account (FSA)?
Here's the honest answer up front: the IRS has not published the official FSA contribution limit for 2027 yet, and it typically won't until a Revenue Procedure drops in the fall of the prior year. What we can tell you is the recent trend, the current confirmed numbers, and exactly where to look the moment the real 2027 figure is announced so you're not caught off guard during open enrollment. For 2025, the Health FSA limit sits at $3,300 per IRS Revenue Procedure 2024-40. For 2026, the IRS bumped it to $3,400 under Revenue Procedure 2025-32. Based on that pattern, most benefits professionals expect the 2027 number to land somewhere in the $3,400 to $3,600 range, but that's an educated guess, not a fact, until the IRS says otherwise.
This guide walks through what an FSA actually is, what we know so far about 2027 limits, how carryover and grace periods work, what you can spend the money on, and the deadlines you'll want on your calendar whether you're an employee picking an election or an HR person setting up next year's plan.
What Exactly Is an FSA, and How Is It Different From an HSA?
A Flexible Spending Account (FSA) is a pretax benefit your employer sets up under Section 125 of the tax code, sometimes called a cafeteria plan. You elect an amount at open enrollment, it comes out of your paycheck before taxes, and you use it during the plan year on qualified expenses. The money is technically owned by your employer's plan, not by you personally, which is the biggest difference from a Health Savings Account.
An HSA requires you to be enrolled in a high-deductible health plan, the account is yours forever even if you switch jobs, and unused money rolls over year after year with no limit. An FSA is generally use-it-or-lose-it, tied to your current employer, and doesn't require any specific health plan to qualify.
There are actually three common flavors of FSA, and it helps to know which one you have:
●Health FSA: covers a broad range of medical, dental, and vision expenses for you and your dependents.
●Limited Purpose FSA (LPFSA): restricted to dental and vision costs only, designed to pair with an HSA without disqualifying you from HSA contributions.
●Dependent Care FSA (DCFSA): pays for daycare, preschool, or after-school care so you and your spouse can work, and it runs on a completely separate limit set by different tax law.
So What's the Actual FSA Contribution Limit for 2027?
The IRS adjusts the Health FSA limit for inflation each year under Section 125(i), and it announces the new number through a Revenue Procedure, usually released in September or October of the prior year. That's why, as of this writing, we don't yet have an official 2027 figure. Here's the recent history so you can see the pattern:
●2024: $3,200 (IRS Revenue Procedure 2023-34)
●2025: $3,300 (IRS Revenue Procedure 2024-40)
●2026: $3,400 (IRS Revenue Procedure 2025-32)
That's roughly a $100 bump each year, tracking general inflation. If that pattern holds, a reasonable working estimate for 2027 is somewhere between $3,400 and $3,600. But please don't build your open enrollment materials around a guess. The IRS typically posts the real number on IRS.gov's Newsroom page in the fall before the plan year starts, and your benefits broker or TPA should flag it the moment it's released. If you're an employer, this is also a good moment to lean on your FSA administration partner to make sure your plan documents and payroll system get updated the second the new limit is official, rather than scrambling in November.
What About Limited Purpose FSA and Dependent Care FSA Limits for 2027?
These two get confused a lot, so let's separate them clearly:
●Limited Purpose FSA: because it's technically a type of Health FSA under IRS rules, it shares the exact same dollar limit as the regular Health FSA. So whatever the 2027 Health FSA number ends up being, that's your LPFSA number too.
●Dependent Care FSA: this one runs on completely different math. The limit is $5,000 per household ($2,500 if you're married and filing separately), set by IRC Section 129. Unlike the Health FSA, this figure is not indexed for inflation, which is why it's stayed at $5,000 since 1986 with one brief exception. The American Rescue Plan Act temporarily raised it to $10,500 for the 2021 plan year only, and it reverted back to $5,000 afterward. Barring new legislation from Congress, expect the 2027 Dependent Care FSA limit to remain at $5,000.
The distinction matters for HR teams building open enrollment communications, because employees often assume both limits move together each year. They don't, and clarifying that upfront saves a lot of confused emails in January.
Can I Carry Over Unused FSA Money Into 2027?
The original FSA rule was strict: spend it or lose it by the end of the plan year. The IRS softened that with Notice 2013-71, which lets employers optionally allow a carryover of unused Health FSA funds into the next plan year. Notice 2020-33 capped that carryover at 20% of the annual Health FSA contribution limit. So the cap moves as the limit moves:
●2025 plan year carryover cap: $660 (20% of $3,300)
●2026 plan year carryover cap: $680 (20% of $3,400)
●2027 plan year carryover cap: will be 20% of whatever the official 2027 limit turns out to be
Instead of carryover, an employer can offer a grace period of up to two and a half months into the new plan year, per IRS Notice 2005-42, letting you spend down last year's balance before it disappears. Employers can offer one option or the other, not both, and it's entirely their choice whether to offer either. Dependent Care FSAs generally don't get carryover treatment under standard rules, so check your Summary Plan Description to see exactly what your employer chose, because this varies a lot from company to company.
What Can I Actually Spend My FSA Money On?
Eligible expenses are defined by IRS Publication 502, and the list is broader than most people realize. Common qualifying purchases include:
●Doctor, dentist, and specialist copays and deductibles
●Prescription medications and insulin
●Vision care, including eyeglasses, contacts, and eye exams
●Dental work like cleanings, fillings, and orthodontia
●Mental health therapy and counseling sessions
●Chiropractic care and physical therapy
●Hearing aids and batteries
●Certain over-the-counter medications, without a prescription, since the CARES Act permanently restored this in 2020
●Menstrual care products, also added under the CARES Act
●Sunscreen with SPF 15 or higher and first-aid supplies
You'll typically use a debit card tied to the account, but the IRS requires substantiation, meaning you may need to submit a receipt showing the date, provider, and expense type if the purchase doesn't auto-verify. Things that generally don't qualify include general gym memberships, cosmetic procedures, and most vitamins purchased for general health rather than a diagnosed condition. When in doubt, your plan administrator can confirm before you swipe the card.
How Do Employees Enroll, and How Does HR Set This Up for 2027?
For employees
You'll make your election during your employer's open enrollment window, picking a dollar amount based on what you realistically expect to spend, since Health FSA funds don't roll over indefinitely. One quirk worth knowing: under the IRS's uniform coverage rule, your full Health FSA election is available to spend starting day one of the plan year, even though you haven't finished paying into it through payroll yet. Dependent Care FSA doesn't work that way; you can only use funds already deducted from your paycheck.
For HR and benefits admins
Getting ready for a new plan year involves a checklist most teams start well before open enrollment opens:
1.Confirm the official new-year IRS limit once released and update plan documents and the Summary Plan Description
2.Decide whether to offer carryover, a grace period, or neither for the coming year
3.Load new limits and elections into payroll and your TPA's system before the first payroll of the new plan year
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