Health Care FSAs and Dependent Care FSAs are often grouped together, but the rules that govern their contribution limits are very different. Knowing how those limits are set and when they apply helps brokers guide employers and avoid common compliance issues.

Health Care FSA Limits: Plan Year Driven

For Health Care FSAs, the IRS sets a flat annual dollar limit on employee salary reduction contributions. For 2026, that limit is $3,400.

How the limit applies

• Health Care FSA limits apply on a plan year basis, not the calendar year
• This is especially important for non-calendar-year plans and short plan years
• A full 12-month plan year allows the full annual limit
• A short plan year requires the limit to be prorated based on the number of months in the plan year
• Employees who enter the plan mid-year are generally not subject to proration, as long as the plan year itself remains a full year
• Employers may not change from a calendar year to a fiscal year solely to delay application of the limit
• If the primary purpose of a plan year change is to avoid the cap, the IRS will not recognize the change

What counts toward the limit

• Limit applies only to employee salary deferrals
• Employer contributions, such as matching contributions, seed money, or flex credits, generally do not count toward the $3,400 cap

Important note: If employees elect to receive employer contributions in cash or as a taxable benefit, the contributions will be treated as salary reductions and will count toward the limit if contributed to the health FSA.

Who the limit applies to

• The limit is per employee, regardless of family size
• Employees cannot increase their contribution just because they cover a spouse or dependents
• If spouses each have access to their own employer-sponsored Health Care FSA, each spouse gets their own full limit, even if they work for the same employer

One important exception: If an employee participates in multiple Health Care FSAs offered by employers within a controlled group or affiliated service group, the contributions are aggregated, and a single limit applies.

Dependent Care FSA Limits: Calendar Year and Household-Based

Dependent Care FSAs follow a different framework. For 2026, the maximum exclusion is $7,500. Married individuals filing separately are limited to $3,750 for 2026.

In addition, the exclusion is limited to the lesser of the employee’s earned income or the spouse’s earned income.

How the limit applies

• Dependent Care FSA limits apply on a calendar year basis, tied to the participant’s taxable year
• This is especially important for non-calendar-year cafeteria plans
• Contributions may span two calendar years but are still capped annually

What counts toward the limit

• All contributions count toward the limit, including both employee and employer contributions

Who the limit applies to

• Dependent Care FSA limits apply per household, not per employer
• If both spouses have access to a Dependent Care FSA, combined contributions across all plans cannot exceed the annual household limit

Why This Matters

FSA limits don’t work the same way, and misunderstandings can quickly lead to compliance issues or employee frustration. When brokers clearly explain these differences, employers are better equipped to administer their plans correctly and employees avoid unexpected tax surprises.

If you have questions about FSA limits or need a trusted partner for Health Care and Dependent Care FSA administration, Medcom is here to support you. Contact us to get started.

 

Resource: Larry Grudzien, Attorney at Law