Blog · 16 October 2026

Health FSA Under a §125 Cafeteria Plan: FSAFEDS Open Season 2026, Carryover vs Grace Period, and What US CPA Firms Should Tell Clients

By Keshav Bansal, CA

A health FSA under a §125 cafeteria plan is still one of the highest-ROI payroll elections US employers offer—and one of the easiest for clients to forfeit. FedTools (Oct. 4, updated Oct. 8, 2026) flags the federal FSAFEDS open season window of November 9–December 14, 2026 (11 pm ET), and reminds readers that FSAFEDS does not auto-renew: skip re-enrollment and unused carryover is forfeited. The same §125 mechanics apply to private-sector plans. US CPA firms that treat open season as a benefits brochure miss the tax rules that drive elections, W-2 reporting, and HSA eligibility.

What a health FSA is under §125

Under IRC §125, a cafeteria plan lets employees choose among cash and qualified benefits. Salary reductions for a health flexible spending arrangement are capped by §125(i). IR-2025-103 (Oct. 9, 2025) and Rev. Proc. 2025-32 §4.15 set the 2026 voluntary employee salary-reduction limit at $3,400. If the cafeteria plan permits carryover of unused amounts, the maximum carryover is $680. Publication 15-B (2026) restates that limit and warns that a plan which does not cap health FSA salary reductions at the statutory dollar amount is not a cafeteria plan—and all benefits under the plan become includible in gross income.

Health FSA reimbursements for qualifying medical expenses are generally excluded when the arrangement sits properly inside the cafeteria plan (§105/§106). That is a different Code path from a dependent care FSA under §129. The 2027 dependent care FSA household cap remains $7,500 ($3,750 married filing separately) because that figure is fixed in §129(a)(2)(A)—see our dependent care FSA $7,500 article for Box 10 / Form 2441. As of FedTools’ Oct. 8, 2026 update, the IRS had not yet published the 2027 health FSA salary-reduction limit or carryover; use the 2026 $3,400 / $680 figures until a new revenue procedure or IR appears.

Pre-tax for income tax and FICA—until the wage base

Qualified cafeteria-plan salary reductions for a health FSA typically reduce wages subject to federal income tax withholding and FICA. That dual saving is why FedTools and OPM describe roughly a 30% effective discount for many federal employees. The Social Security (OASDI) piece stops at the wage base: SSA and IRS Topic 751 put the 2026 Social Security taxable maximum at $184,500. Above that line, an additional FSA dollar still avoids income tax withholding and the 1.45% Medicare tax (plus Additional Medicare Tax where it applies), but it no longer avoids the 6.2% employee Social Security tax. Clients with wages already above $184,500 need that illustration before they “max” the FSA for FICA reasons that no longer exist.

Use-it-or-lose-it: carryover or grace period, not both

Health FSAs remain subject to use-it-or-lose-it, softened in two mutually exclusive ways. Notice 2013-71 (and Publication 15-B’s citations to Notices 2013-71 and 2020-33) allow a cafeteria plan to permit a limited carryover of unused health FSA amounts into the next plan year instead of a grace period of up to 2½ months. A plan may offer carryover, or a grace period, or neither—but not both. For 2026, when carryover is offered, Rev. Proc. 2025-32 caps it at $680. FSAFEDS has adopted carryover for its Health Care and Limited Expense accounts; FedTools stresses that carryover still requires re-enrollment for the next benefit period, or the participant forfeits the carryover account.

Irrevocable elections, qualifying events, and uniform coverage

Except for limited mid-year changes tied to qualifying life events (and plan rules consistent with the cafeteria-plan regulations), the employee’s health FSA election is locked for the plan year. That irrevocability is why the November–December open-season window matters for calendar-year plans.

The uniform coverage rule is the other operational trap: the maximum annual reimbursement elected must be available from the first day of the coverage period, even though salary reductions are taken ratably. An employee who elects $3,400 and incurs $3,400 of eligible expenses in January is generally entitled to full reimbursement then—even if only one twelfth has been withheld. Employers that reimburse only “what has been contributed so far” are not running a compliant health FSA. Dependent care FSAs follow different timing rules; do not conflate the two when reviewing plan documents.

General health FSA vs limited-purpose FSA and HSAs

A general-purpose health FSA that can reimburse medical expenses before the HDHP deductible generally makes the individual ineligible to contribute to an HSA. A limited-purpose health FSA—typically limited to dental, vision, and other permitted coverage/preventive care—does not. FedTools and IRS Publication 969 make the same point for FSAFEDS: HDHP + HSA clients should elect the Limited Expense Health Care FSA. For 2026 HSA eligibility changes (bronze/catastrophic HDHPs, telehealth, direct primary care), see our Notice 2026-05 HSA eligibility article. Separately, Rev. Proc. 2026-24 sets 2027 HSA contribution limits at $4,500 (self-only) and $9,000 (family)—useful when clients choose between FSA and HSA dollars for next year.

FSAFEDS open season 2026 as a calendar reminder

OPM’s Federal Benefits Open Season page confirms November 9–December 14, 2026 for 2027 plan-year elections. FedTools attributes the FSAFEDS cutoff as 11 pm Eastern on Monday, December 14, 2026, and quotes OPM that enrollment “does NOT carry forward year to year.” FedTools also notes a new FSAFEDS Visa FSA Card for 2027 Health Care and Limited Expense accounts, selected during Open Season. Private plans may already offer debit cards; the federal launch is a client-education hook, not a Code change. Payroll controls after election season still matter—see our Box 12 code TT article for related W-2 Box 12 discipline—but health FSA dollars are cafeteria salary reductions, not §225 overtime.

CPA checklist for health FSA season

1. Confirm the plan’s §125(i) limit ($3,400 salary reduction for 2026; watch for the 2027 IR/Rev. Proc.).
2. Read carryover vs grace period—one, not both (Notice 2013-71).
3. Model FICA savings only below the $184,500 Social Security wage base for 2026.
4. Separate §125 health FSA advice from §129 dependent care ($7,500 for 2027 is statutory).
5. Flag HSA incompatibility for a general-purpose health FSA on an HDHP enrollee; offer limited-purpose alternatives.
6. Test uniform coverage in claims admin: full annual election available day one.
7. For federal-employee clients, calendar FSAFEDS re-enrollment Nov. 9–Dec. 14, 2026 (11 pm ET per FedTools) so carryover is not forfeited.
8. Treat the 2027 health FSA dollar limit as unpublished until IRS issues it; ignore vendor projections.

Where Tax Brew fits

Health FSA open season is a benefits-and-payroll control problem: plan documents, election locks, HSA screens, and cafeteria reporting. Tax Brew supports US CPA firms with tax prep support, bookkeeping and cleanup so reviewers can spend more time on §125/§129 judgment calls. The first 20 hours are free for qualifying engagements. See our services, or email info@taxbrewglobal.com.

Sources: IRS IR-2025-103 (Oct. 9, 2025) and Rev. Proc. 2025-32 §4.15 (2026 health FSA $3,400 / $680 carryover under §125(i)); Publication 15-B (2026); Notice 2013-71 (carryover vs grace period); Rev. Proc. 2026-24 (2027 HSA $4,500 / $9,000); SSA / IRS Topic 751 (2026 Social Security wage base $184,500); OPM Federal Benefits Open Season and Flexible Spending Accounts pages; FedTools, “FSAFEDS Open Season 2026” (Oct. 4, updated Oct. 8, 2026). General information, not tax or legal advice. As of 16 October 2026.