Health FSAs still have a use-it-or-lose-it backbone. The IRS lets employers soften it two different ways:
- Grace period: up to 2 months + 15 days after year-end to incur prior-year claims
- Carryover: move up to $680 (for 2026) into the next plan year
You pick one. Not both.
How to choose
Choose carryover if employees hate the March claim scramble and you want leftover dollars to feel like a real balance. Choose a grace period if you prefer a hard stop and simpler “prior year vs. current year” claim logic in some admin systems.
Dependent care FSAs don’t get the same carryover rule set — don’t promise parents a $680 DCAP rollover because the health FSA has one.
Midyear planning angle
June is when many sponsors start OE design meetings. If you’re switching from grace period to carryover (or the reverse), say it loudly. Silent design changes are how you get “I thought I had until March 15” tickets in January.
Also update examples in OE guides: a carryover doesn’t reduce the next year’s election limit, which still surprises people in a good way when you explain it clearly.