Key takeaways

• The 2026 FSA contribution limit increased to $3,400, with up to $680 eligible for carryover, giving workers more flexibility to use pre-tax dollars.

• FSAs offer immediate potential tax savings² and upfront access to annual funds, making them useful for managing predictable healthcare expenses.

• Many workers leave money on the table, with the latest data showing about half of FSA holders forfeiting an average of $441 in unused funds.

Flexible Spending Accounts (FSAs) are gaining renewed attention as healthcare costs remain top of mind for households. These employer-sponsored accounts let workers set aside pre-tax dollars for qualified medical expenses, offering a way to potentially reduce taxable income while planning for healthcare needs.

Nearly half (47%) of private industry workers and almost three quarters (72%) of state and local government workers had access to an FSA in 2025.¹ Yet many still may not be taking full advantage of the opportunity. According to the most recent data from the Employee Benefit Research Institute, the average FSA contribution was $1,291 — well below the contribution threshold — and about half forfeited unused funds of $441 on average to their employer at the end of the annual plan period.² This suggests many consumers may need more clarity on how they can use FSAs effectively.

How FSAs work

FSAs can be used for a wide range of qualified medical expenses, including prescription medications, copayments, insurance premiums and deductibles, and coinsurance.³ Typically, you choose your annual contribution amount during your employer’s open enrollment period (or after a qualifying life event), and that election generally remains in place for the year unless your circumstances change. Funds are contributed through automatic payroll deductions and deposited into your FSA over the course of the year.

Read more: FSA vs. HSA: What’s the difference?

Higher FSA contribution limits in 2026

The IRS has bumped up the annual contribution limit for health FSAs to $3,400 this year, up from $3,300 in 2025.⁴ This means workers can pay for more eligible out-of-pocket medical costs with pre-tax dollars.

The maximum amount of 2026 funds that can be carried over into the next plan year also increased to $680 — provided the employer’s plan allows carryovers.⁵ This adjustment offers a bit more flexibility for those who don’t spend every dollar within the year.

Pros of an FSA: Tax savings and budgeting

One of the biggest advantages of an FSA is the immediate tax benefit. Since contributions are pre-tax, participants have potentially lower taxable income.

FSAs can also help with budgeting. Setting funds aside in advance can help you manage predictable costs such as preventative care, prescription medication, therapy visits, premiums, or planned procedures that are FSA-eligible.⁶

Unlike some other tax-advantaged accounts, the full amount of your FSA funds for the year are accessible immediately on day one of your plan year.⁷ This means you can pay for a large eligible expense early in the year — even before you’ve contributed the full amount.

Cons of an FSA: “Use it or lose it”

The primary drawback of FSAs is the “use-it-or-lose-it” rule. In most cases, any unused funds at the end of the plan year are forfeited. While the $680 carryover helps, it doesn’t eliminate the risk entirely.

FSAs have another limitation as well. Since they are employer-sponsored, if you leave your job, you may lose access to unused funds unless you qualify for continuation coverage such a grace period, carryover, or COBRA, depending on your plan provisions.

Read more: Medical FSAs: Use it or lose it time is here

Who should consider an FSA?

An FSA can be an attractive option if you have regular predictable healthcare expenses and you can estimate your annual costs with reasonable accuracy. You may want to consider conservative contributions if you’re uncertain about your medical spending or might change jobs during the year.

Avoiding common FSA pitfalls

There are a few things you can do proactively to help make the most of an FSA in 2026:

• Make realistic estimates: Base your contributions on costs you know or strongly expect are coming during the year.

• Track spending: Monitor your balance throughout the year so you don’t end up with unused funds at the end of the year.

• Check eligible expenses: Review the FSA eligibility list to ensure purchases qualify.⁸

• Understand your plan rules: Know whether your employer offers a carryover or grace period.

Ultimately, when used strategically, FSAs can be a valuable tool to help you manage healthcare costs and potentially reduce taxable income.

Read more: HSA, FSA & HRA reimbursement explained