IRS Announces 2027 FSA and Commuter Benefit Limits

The Internal Revenue Service (IRS) has released its annual inflation adjustments for tax year 2027, including increases to contribution limits for health flexible spending accounts (FSAs) and qualified transportation benefits. These changes provide employees with additional opportunities to set aside pre-tax dollars for eligible healthcare and commuting expenses.

Employers should review the updated limits as they prepare their benefit plans, payroll systems, and employee communications for 2027 open enrollment.

Health FSA Contribution Limit Increases to $3,500

For plan years beginning in 2027, employees may contribute up to $3,500 to a health FSA through pre-tax salary reductions, an increase of $100 from the 2026 limit of $3,400.

Health FSAs allow employees to use pre-tax dollars to pay for eligible out-of-pocket medical expenses, including deductibles, copayments, prescription medications, and other qualified healthcare expenses.

The IRS limit applies to employee salary reduction contributions. Employers may establish a lower contribution limit under their plans.

Health FSA Carryover Limit Increases to $700

Employers offering health FSAs with a carryover provision may allow employees to carry over up to $700 in unused funds from a plan year beginning in 2027 to the following plan year. This represents a $20 increase from the 2026 maximum of $680.

The carryover feature allows employees to retain a limited amount of unused FSA funds rather than forfeiting them at the end of the plan year.

Employers should remember that:

• Carryovers are optional and must be permitted under the employer’s plan.
• Employers may establish a carryover maximum below the IRS limit.
• Health FSAs generally cannot offer both a carryover and a grace period for the same plan year.
• Carryover funds generally do not reduce the amount an employee may elect to contribute for the following plan year.

Employers should review their plan documents and enrollment materials to ensure that the applicable carryover provisions are accurately reflected.

Qualified Transportation and Parking Benefits Increase to $350

The IRS also announced an increase in the monthly exclusion limits for qualified transportation fringe benefits.

For 2027, employees may receive up to:

• $350 per month for qualified parking expenses, up from $340 in 2026.
• $350 per month for qualified transit passes and commuter highway vehicle transportation benefits, up from $340 in 2026.

These limits apply separately, meaning an employee who qualifies for both parking and transit benefits may receive up to $350 per month for each category on a tax-free basis.

Qualified transportation benefits can help employees reduce the cost of commuting while providing employers with a tax-advantaged benefit option.

What Employers Should Do Now

With the 2027 limits announced, HR should begin preparing for the upcoming plan year.

Employers should review their health FSA contribution limits and determine whether to adopt the new maximum. Those offering FSA carryovers should confirm whether their plans will permit the increased carryover amount.

Employers offering commuter benefits should also coordinate with their payroll and benefits administration providers to ensure that the new monthly limits are properly reflected in deduction systems.

Finally, open enrollment materials, employee communications, and plan documents should be reviewed and updated as necessary.

Taking these steps before the start of the new plan year can help prevent enrollment errors, incorrect payroll deductions, and employee confusion.

The updated limits apply to tax years or plan years beginning in 2027, as applicable.