Health FSA Carryover, Grace Period, and Run-Out Rules
Three different features decide what happens to unspent health FSA dollars at year end. Employers can offer a carryover or a grace period, but not both, and a run-out period works alongside either one.
Three Features, Three Different Jobs
Employers often blur these terms. They answer different questions, and mixing them up leads to plan documents that do not match how the FSA actually runs.
Carryover
Lets participants roll a limited amount of unused health FSA money into the next plan year. For 2026 the maximum carryover is $680. The plan sets the amount, up to that cap, and may allow less. Employees should know the exact amount their plan allows, since it may be lower than the federal cap. Spell the rule out in enrollment materials and ask your administrator how balances are tracked.
Grace Period
Gives participants up to two and a half months after the plan year ends to incur new expenses against last year’s balance. It extends the time to spend, not the amount that can be kept. Because the window is short, employees need reminders before the new year starts. Confirm with your administrator whether the plan actually adopted this feature and how long the window runs.
Run-Out Period
A deadline after year end to submit claims for expenses already incurred during the plan year. The plan document sets its length, and it does not extend the time to incur expenses. Employees often confuse this deadline with the time to incur expenses. Put the claim submission date in reminders and enrollment materials so that employees file before it passes.
Either, Not Both
A health FSA may offer a carryover or a grace period, but not both at once. A plan can also offer neither and apply the traditional use-it-or-lose-it rule. Employers should choose based on how employees use the account and on administrative simplicity. Plan documents must clearly state which option applies, or that neither does.
Dependent Care Is Different
The carryover option applies to health FSAs. Dependent care FSAs may offer a grace period but cannot offer a carryover. Employees who use both accounts should be told which rules apply to each. Check the plan documents to confirm the dependent care account’s terms, and ask your administrator if unsure.
2026 Annual Limit
The health FSA salary reduction limit for 2026 is $3,400 under Rev. Proc. 2025-32. A carryover does not count against the next year’s limit. The limit applies to employee salary reductions, and it is adjusted for inflation over time. Confirm the current year’s number with your administrator and print it in enrollment materials.
Choosing Between Carryover and Grace Period
Neither option is better in every case. The right choice depends on the workforce, the administrator, and whether employees are paired with HSAs.
When Carryover Fits
A carryover is simple to explain and keeps a small balance available all year. It suits plans where employees tend to leave modest amounts unspent. Employers weighing the options can look at past balances and employee questions to see which feature would be used. Ask your administrator for de-identified forfeiture history before deciding.
When a Grace Period Fits
A grace period helps employees who want to use a larger balance on a known expense, such as an eyeglass or dental visit early in the new year. A grace period gives employees more time, but it also extends the claims cycle. Employers should compare it to a carryover with their administrator before choosing the feature.
The Run-Out Period
Most plans pair either feature with a run-out period so claims for late-year expenses can still be filed. Confirm the length with the claims administrator and print it in the plan document. Employers should state the length in enrollment materials and remind employees as the deadline approaches. Ask the administrator how claims received after the run-out date are handled.
Uniform Coverage Rule
The full annual election must be available to the participant from the first day of coverage, regardless of how much has been contributed through payroll. This means the plan may need to reimburse expenses before the employee has paid the full election through payroll. Employers should ask their administrator how it handles this and what happens at termination.
Termination of Employment
Rules for former employees depend on the plan document. Many plans reimburse only expenses incurred through the termination date unless COBRA continuation applies. Employees leaving the company need to know whether they can still submit claims and by when. Include these rules in exit materials and ask counsel or your administrator to confirm how COBRA applies.
Written Plan Amendment
Adding a carryover or grace period requires a written amendment to the cafeteria plan and the health FSA plan document. Check the amendment deadline with the plan’s legal counsel. Don’t turn on a feature in practice before the paperwork is complete. Counsel can confirm the deadline and the wording, and your administrator can supply sample language for the plan document.
How Each Feature Affects HSA Eligibility
A general-purpose health FSA can make an employee ineligible to contribute to an HSA. Carryover and grace period features can extend that problem into the next year.
General-Purpose FSA Coverage
Unused general-purpose health FSA coverage that carries into a new plan year can make an employee HSA-ineligible during that period. Employees who plan to contribute to an HSA should talk to a tax adviser about how an FSA balance can affect their eligibility. HR should explain the timing in plain language.
Limited-Purpose Option
Limiting FSA reimbursements to dental and vision expenses keeps HSA eligibility intact. Plans often pair a limited-purpose FSA with an HSA. Employers should check that plan documents clearly restrict reimbursements to the allowed expenses and that the administrator enforces them. A tax adviser can confirm the setup works with an HSA.
Employee Communication
Employees who switch from an FSA to an HSA plan need clear guidance before the year ends so they can avoid an ineligible contribution month. Send a short reminder in the fall, explaining the timing and who to call with questions. Encourage employees to talk to a tax adviser about their own situation instead of relying on general guidance.
Ongoing Coordination
Our guide on how FSAs, HRAs, and HSAs interact covers combinations in more detail. Review this with your administrator before open enrollment. Combining FSAs, HRAs and HSAs needs a plan-by-plan review. Share the proposed design with your administrator and a tax adviser so enrollment materials and payroll settings match.
Health FSA Carryover and Grace Period Questions
What is the 2026 health FSA carryover maximum?
The maximum carryover for 2026 is $680 under Rev. Proc. 2025-32. A plan may allow a lower carryover amount.
Can a plan offer both a carryover and a grace period?
No. A health FSA may offer one or the other. It can also offer neither.
How long can a grace period last?
Up to two and a half months after the end of the plan year, as set out in IRS Notice 2005-42.
What is a run-out period?
A deadline after year end for participants to submit claims for expenses incurred during the plan year. The plan document sets it.
Can a dependent care FSA have a carryover?
No. Only health FSAs may offer the carryover. Dependent care FSAs may offer a grace period.
Does the carryover count toward the next year’s limit?
No. The carryover does not count against the annual salary reduction limit for the new year.
Does adding a carryover require a plan amendment?
Yes. A written amendment to the cafeteria plan and FSA documents is needed. Confirm timing with plan counsel.
Does a carryover affect HSA eligibility?
It can. A general-purpose FSA balance carried into the new year may prevent HSA contributions. A limited-purpose FSA avoids this.
Is this legal advice?
No. This page is general information, not legal advice. Rules change and facts differ, so confirm your situation with your attorney or tax advisor.
Related Guides
Related reading: HSA, FSA, and Section 125 Limits · Section 125 Cafeteria Plans · FSA, HRA, and HSA Coordination · Dependent Care FSA Rules · Mid-Year Election Changes
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Laws and rules referenced
26 U.S.C. § 125 — Cafeteria plans: pre-tax premium payments, plan limits and nondiscrimination rules.
IRS Notice 2013-71 — Health FSA carryover of unused amounts.
IRS Notice 2005-42 — The grace period for cafeteria plan health and dependent care FSAs.
This page is general information, not legal or tax advice. Rules change and facts matter, so confirm your situation with counsel or a qualified advisor.
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