FSA Grace Period vs. Carryover: What Employers Need to Know for 2026

2026-08-13 • 7 min read

A Health FSA can offer a 2.5-month grace period or a dollar carryover, never both. See the 2026 carryover limit, how each option works, and which one fits your plan.

Quick Answer (as of 2026): A Health FSA can offer employees either a 2.5-month grace period or a dollar carryover into the next plan year, never both, under IRS Notice 2013-71. For plan years ending in 2026, the maximum carryover amount is $680. Employers must pick one option in the plan document. Dependent Care FSAs do not qualify for either option.

An FSA grace period and an FSA carryover both give employees extra time to use unspent Health FSA money inside a Section 125 cafeteria plan, but they are not the same rule, and a plan document can only offer one of the two. This distinction trips up a lot of first-time plan sponsors during open enrollment, since both options sound like they solve the same "use it or lose it" problem. They do, but in different ways, with different deadlines and different dollar limits attached.

What Is an FSA Grace Period?

An FSA grace period extends the deadline for spending Health FSA funds by up to 2 months and 15 days after the plan year ends. An employee with unspent 2026 FSA money in a plan offering a grace period can keep incurring new eligible expenses through mid-March 2027 and apply those funds to leftover 2026 dollars. There is no dollar cap on a grace period. An employee can use the full remaining balance during the extra window, not just a portion of it.

What Is an FSA Carryover?

An FSA carryover lets an employee roll over a limited dollar amount of unspent Health FSA funds directly into the next plan year, with no new expenses required and no time limit on when the carried-over money gets spent within that next year. Unlike a grace period, a carryover is capped at a fixed dollar figure set by the IRS each year. For plan years ending in 2026, that cap is $680, according to IRS Revenue Procedure 2025-32. Any amount above the cap is forfeited under the standard use-it-or-lose-it rule.

Can an Employer Offer Both a Grace Period and a Carryover?

No. IRS Notice 2013-71 states directly that a plan adopting the carryover provision cannot also offer a grace period on the same Health FSA. Employers pick one option and write it into the plan document. The plan document controls here. If the document is silent on both, or names a grace period, no carryover exists even if an employee assumes one does.

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How Much Can Employees Carry Over in 2026?

Employees in a plan offering the carryover option can roll over up to $680 in unspent Health FSA funds into the following plan year for plan years ending in 2026, per IRS Revenue Procedure 2025-32. The carryover limit is set at 20% of the maximum Health FSA salary reduction contribution for the year, which is $3,400 for 2026. Any balance above $680 is forfeited at the end of the plan year unless the employer's plan also runs a short administrative run-out period for filing claims already incurred, which is a separate, unrelated deadline from both the grace period and the carryover.

Does the Carryover Rule Apply to Dependent Care FSAs?

No. Both the grace period and the carryover options under IRS Notice 2013-71 apply only to Health FSAs. A Dependent Care FSA is always subject to the strict use-it-or-lose-it rule at the end of the plan year, with no carryover allowed under current IRS guidance, regardless of what the Health FSA in the same plan offers. An employer offering both account types needs separate communication for each, since employees frequently assume the rules match.

Which Option Should an Employer Choose?

A grace period tends to fit workforces with unpredictable, lumpy medical expenses, since it removes the dollar cap entirely and gives employees a full 2.5 extra months to spend down a balance of any size. A carryover tends to fit workforces that want a simpler, one-time rollover with no new enrollment period paperwork, since the funds move automatically into the next year without requiring the employee to incur anything new. Employers also weigh administrative cost alongside the broader FICA tax savings a Section 125 plan already generates, since a carryover generally requires less claims processing during the extra window than a grace period does, with no new expense submissions arriving after the plan year closes.

Feature	Grace Period	Carryover
Extra time to spend funds	Up to 2.5 months	No time limit within the next plan year
Dollar cap	None	$680 for 2026
New expenses required	Yes	No
Can combine with the other option	No	No
Applies to Dependent Care FSA	No	No

Frequently Asked Questions

What is the difference between an FSA grace period and an FSA carryover?

An FSA grace period gives employees up to 2.5 extra months after the plan year ends to spend leftover Health FSA funds on new expenses, with no dollar cap. An FSA carryover instead rolls over a capped dollar amount, $680 for 2026, directly into the next plan year with no new expense required. A plan can offer one option or the other, never both, under IRS Notice 2013-71.

How much FSA money can carry over into 2027?

The IRS has not yet released the official Health FSA carryover limit for plan years ending in 2027. IRS Revenue Procedure 2025-32 set the 2026 carryover limit at $680, tied to 20% of the $3,400 Health FSA contribution limit for 2026. The IRS typically publishes the next year's limit in a Revenue Procedure released in the fall.

Can an employer offer both a grace period and a carryover?

No. IRS Notice 2013-71 explicitly prohibits combining a grace period and a carryover on the same Health FSA. An employer's Section 125 plan document must name one option or the other, and the plan document controls which rule actually applies to employees.

Does the FSA carryover limit apply to Dependent Care FSAs?

No. Neither the grace period nor the carryover option applies to Dependent Care FSAs under current IRS guidance. A Dependent Care FSA is subject to the standard use-it-or-lose-it rule at the end of every plan year, regardless of what carryover or grace period option the employer's Health FSA offers.

What happens to FSA money that is not spent and not carried over?

Unspent Health FSA money above the carryover limit, or unspent after a grace period ends, is forfeited to the employer under the IRS use-it-or-lose-it rule. Employers may use forfeited funds to offset plan administrative costs or reduce next year's premiums, but the specific employee who forfeited the money cannot get it back.

Is a grace period the same as a run-out period?

No. A grace period extends the window for incurring new eligible expenses using the prior year's leftover funds. A run-out period only extends the deadline for filing claims for expenses that were already incurred before the plan year ended. The two serve different purposes and can both appear in the same plan document.

Can an employer change from a grace period to a carryover mid-year?

No. A Section 125 plan document generally must be amended before the start of a new plan year to switch between a grace period and a carryover, and the change applies prospectively to the upcoming plan year, not retroactively to funds already accumulated under the current rule.

Which option costs an employer more to administer?

A grace period generally creates more administrative work, since the plan must accept and process new claims for up to 2.5 months after the plan year closes. A carryover moves a fixed, already-known dollar amount into the next year automatically, which typically requires less ongoing claims processing during the transition window.

See Your Section 125 Options

Employers weighing an FSA against zero-cost supplemental benefit options can layer either design on top of an existing cafeteria plan without changing the underlying FICA math.

Sources: Internal Revenue Service Notice 2013-71, Internal Revenue Service Revenue Procedure 2025-32.