FSA Open Enrollment: The $680 Carryover vs. the 2.5-Month Grace Period

Open enrollment season is the one moment each year when a single checkbox decides whether hundreds of your pre-tax dollars survive into next year — or vanish. If your employer offers a health flexible spending arrangement (FSA), you are about to elect your 2026 contribution with imperfect information about next year's medical bills. Elect too little and you leave tax savings on the table. Elect too much and the use-it-or-lose-it rule takes what's left.

The good news: the IRS softened that rule years ago, and the 2026 numbers just got better. The catch: your plan can protect you with a carryover or a grace period — never both — and a third deadline most employees have never heard of is the one that actually decides what you keep. Here is how all three work, plus the trap that snares small business owners who try to enroll in their own plan.

The 2026 FSA numbers at a glance​

The IRS released the 2026 figures in Revenue Procedure 2025-32, and Congress added a landmark change for dependent care through the One Big Beautiful Bill Act (OBBBA):

A few things to notice. The health FSA limit is per employee, so two working spouses with separate employers can each elect up to $3,400. The dependent care limit is per household — one shared cap no matter how many earners or children are involved. And the carryover cap is always 20% of that year's contribution limit, which is why it moved from $660 to $680.

Your employer can set lower limits than these IRS maximums, so check your plan documents during enrollment rather than assuming you can elect the full amount.

Use-it-or-lose-it is still the default​

Strip away the exceptions and the core rule is unchanged: salary-reduction dollars you put into a health FSA must be spent on qualified medical expenses incurred during the plan year, or you forfeit them. Forfeited money does not come back to you — it stays with the employer, which may use it to offset plan administration costs.

That sounds harsh, but two optional relief valves exist. The key word is optional: the IRS permits them, it does not require them. Roughly speaking, your plan falls into one of three buckets:

1. Carryover plan — up to $680 of unused 2026 money rolls into 2027.
2. Grace-period plan — you get an extra 2.5 months to incur new expenses with leftover money.
3. Neither — a true December 31 cliff, still legal.

Which bucket you are in is the single most important thing to learn before you elect. Ask HR or your benefits administrator directly; the benefits portal summary usually states it, but not always prominently.

Carryover vs. grace period: why your plan can only offer one​

This is the part that confuses almost everyone, so let's be precise.

• Carryover: After the plan year's claim-filing window closes, up to $680 of your unused balance moves into the next plan year. It does not count against next year's $3,400 election — it stacks on top. Anything above $680 is forfeited.
• Grace period: You get up to two months and 15 days after the plan year ends (March 15 for a calendar-year plan) to incur eligible expenses that the leftover balance can reimburse. There is no dollar cap beyond your actual balance — a $2,000 leftover can all be spent during the grace period.

Why can't a plan offer both? Because the IRS said so, explicitly. When the agency created the carryover option in 2013, it made the two mutually exclusive: a Section 125 cafeteria plan may adopt a carryover or a grace period for its health FSA (or neither), but never both at once. The logic is that each is an exception to use-it-or-lose-it, and stacking exceptions would effectively repeal the rule.

Which one is better for you?​

Neither is universally better — it depends on your spending pattern:

• Carryover wins if your leftover balances are usually small (a few hundred dollars) or your medical spending is unpredictable. The money simply follows you into next year with no action required.
• Grace period wins if you tend to have large, schedulable expenses early in the year — think January dental work, new glasses, or a planned procedure. It lets the entire leftover balance, however large, keep working for 2.5 more months.

One more nuance: under a grace-period plan, expenses incurred during those extra months are reimbursed from the prior year's balance first. Keep that ordering in mind if you are also submitting new-year claims.

The run-out deadline: the one that actually decides what you keep​

Here is the deadline almost nobody talks about during open enrollment. The run-out period (sometimes called the claims run-out) is the window after the plan year ends during which you may submit reimbursement claims for expenses you already incurred. It is typically around 90 days — March 31 for a calendar-year plan — but your plan sets the exact date.

Notice how this differs from the other two:

• The grace period extends when you can incur expenses.
• The run-out period extends when you can file paperwork for expenses already incurred.
• Run-out applies regardless of whether your plan has a carryover or a grace period — it is a separate administrative window, not an alternative to either.

Why does it matter so much? Because the carryover amount is measured only after the run-out period closes. Suppose you end December with $900 unspent in a carryover plan. You file $400 of forgotten receipts during run-out. Your remaining balance is $500 — all of it carries over, and nothing is forfeited. But if you miss the run-out deadline with those receipts still in a drawer, the plan measures $900, carries over $680, and you forfeit $220. Same spending, different outcome — decided entirely by a filing deadline.

Practical takeaway: the day your plan year ends, gather every receipt — pharmacy, dental, vision, copays, orthodontia statements — and file them before run-out closes. Set a calendar reminder for early March. This single habit saves more FSA money than any election strategy.

A calendar-year example, end to end​

Assume your plan runs January 1 to December 31 and offers the carryover:

• December 31, 2026: Plan year ends. You have $1,100 unspent.
• January 1 – March 31, 2027: Run-out period. You submit $500 of December dental receipts you had forgotten. Balance: $600.
• After March 31: The plan carries over $600 (under the $680 cap) into your 2027 account. Nothing is forfeited, and you can still elect the full $3,400 for 2027.

If instead you had filed nothing, $680 would carry over and $420 would be forfeited. The receipts were the difference.

The uniform coverage rule: your full election is available on day one​

One feature makes health FSAs unusually employee-friendly: the uniform coverage rule. Your entire annual election must be available for reimbursement from the first day of the plan year, even though your contributions come out of paychecks over the full year.

Elect $3,400, need a $2,800 procedure in February, and you have only contributed $500 so far? The plan still reimburses the full $2,800. The employer bears the risk — if you leave mid-year after spending more than you contributed, the employer generally cannot claw the difference back from your final paycheck beyond what the plan permits.

This is also why employers care about forfeitures and participation patterns: the uniform coverage rule means the plan can lose money on early departures, and forfeitures partly offset that risk.

Dependent care FSAs play by different rules​

If you pay for child care, after-school programs, summer day camp, or adult day care so you (and your spouse, if married) can work, the dependent care FSA just became much more valuable: the 2026 limit jumps to $7,500 per household ($3,750 married filing separately) under OBBBA — the first permanent increase since 1986.

But do not assume the health FSA relief valves apply here:

• No carryover. The IRS carryover exception was written for health FSAs only. Dependent care money left at year-end is subject to use-it-or-lose-it.
• Grace period is allowed. A dependent care FSA may offer the 2.5-month grace period for incurring expenses, and many do.
• No uniform coverage. Dependent care reimbursements are limited to what you have actually contributed so far — there is no day-one full balance.
• Coordination with the tax credit. You cannot double-dip the same expenses through both the dependent care FSA and the Child and Dependent Care Credit. Higher earners usually come out ahead with the FSA exclusion; lower earners should run the numbers both ways, since the credit may be worth more.

Because there is no carryover safety net, be conservative with dependent care elections: only commit dollars you are confident you will spend on qualifying care during the plan year (plus grace period, if offered).

The small business owner trap: you probably cannot enroll in your own FSA​

This is the section that matters most if you run the company. Section 125 cafeteria plans — the vehicle that makes FSAs tax-advantaged — are for employees. The rules specifically prohibit participation by:

• Self-employed individuals (sole proprietors and freelancers),
• Partners in a partnership, and
• More-than-2% shareholders of an S corporation.

That last one bites hardest. If you own over 2% of your S corp, you are not considered an employee for Section 125 purposes — even if you draw a W-2 salary. Enrolling anyway does not just disqualify your own election; it can jeopardize the plan's tax-favored status for every participant. The IRS is explicit on this point, and benefits attorneys treat it as a bright line.

What you can do: sponsor an FSA for your W-2 employees. A health FSA (often paired with a premium-only plan) is a legitimate, low-cost benefit that saves both sides payroll taxes on every contributed dollar. Just keep yourself — and family members whose ownership is attributed to you — out of the participant pool, and have your plan documents professionally drafted or reviewed. C corporation owners face no such restriction and may participate like any employee.

One related tripwire: if you have a high-deductible health plan and contribute to an HSA, a general-purpose health FSA disqualifies you from HSA contributions. The workaround is a limited-purpose FSA covering only dental and vision expenses, which the IRS permits alongside an HSA. This combination is common and explicitly allowed — just make sure your election specifies the limited-purpose design.

Common FSA mistakes to avoid this enrollment season​

1. Electing blind. Review last year's actual out-of-pocket spending — copays, prescriptions, dental, vision, orthodontia, therapy — before picking a number. Most administrators show your year-to-date claims in the portal.
2. Assuming your plan has both protections. It cannot. Confirm carryover or grace period (or neither) before you decide how aggressive to be.
3. Forgetting the run-out deadline. Leftover money plus unfiled receipts is the most common forfeiture story. File everything before the window closes.
4. Over-electing dependent care. With no carryover available, only elect what you will clearly spend.
5. Skipping substantiation. FSA debit card swipes still get substantiated — keep itemized receipts showing the date, provider, service, and amount. A credit card slip alone usually fails an audit.
6. Enrolling as an ineligible owner. If you are self-employed, a partner, or a more-than-2% S corp shareholder, stay out of the plan entirely.

Track FSA dollars like the tax-advantaged money they are​

Every dollar that flows through an FSA needs a paper trail: elections on pay stubs, receipts for each claim, reimbursement records, and — for employers — forfeiture accounting and nondiscrimination testing results. Health FSA forfeitures must be handled according to plan terms, and the plan as a whole must not discriminate in favor of highly compensated or key employees. Sloppy records turn a clean tax benefit into an audit headache for both sides.

That is a bookkeeping discipline like any other: capture each expense when it happens, reconcile reimbursements against claims, and keep the substantiation filed where you can find it at tax time. If you use plain-text accounting, an FSA maps naturally onto a dedicated liability account — contributions in, reimbursements out, forfeitures written off at run-out — giving you a complete audit trail in version-controlled text.

Keep Your Benefits Bookkeeping Organized​

As you navigate open enrollment and manage tax-advantaged accounts through the year, maintaining clear financial records is essential. Beancount.io provides plain-text accounting that gives you complete transparency and control over your financial data — no black boxes, no vendor lock-in. Get started for free and see why developers and finance professionals are switching to plain-text accounting.