Legal Alert: IRS Adjusts Health Flexible Spending Account and Other Benefit Limits for 2027

IRS Adjusts Health Flexible Spending Account and Other Benefit Limits for 2027

The Internal Revenue Service (IRS) recently released Revenue Procedure 2026-35, which increases the health flexible spending account (FSA) salary reduction contribution limit to $3,500 for plan years beginning in 2027, an increase of $100 from 2026. Thus, for health FSAs with a carryover feature, the maximum carryover amount is $700 (20% of the $3,500 salary reduction limit) for plan years beginning in 2027. When carrying over funds from 2026 to 2027, 20% of the $3,400 salary reduction limit for 2026 is $680.

The Revenue Procedure also contains the cost-of-living adjustments that apply to dollar limitations in certain other sections of the Internal Revenue Code. 

Qualified Commuter Parking and Mass Transit Pass Monthly Limit 

For 2027, the monthly limits for qualified parking and mass transit increase to $350 each, an increase of $10 from 2026. 

Adoption Assistance Tax Credit Increase

For 2027, the credit allowed for adoption of a child is $18,250 (up $580 from 2026). The credit begins to phase out for taxpayers with modified adjusted gross income in excess of $273,680 (up $8,600 from 2026) and is completely phased out for taxpayers with modified adjusted gross income of $313,680 or more (up $8,600 from 2026).

Qualified Small Employer Health Reimbursement Arrangement (QSEHRA) Increase

For 2027, reimbursements under a QSEHRA cannot exceed $6,700 (single) / $13,550 (family), an increase of $250 (single) / $450 (family) from 2026.

Reminder: 2027 HSA Contribution Limits and HDHP Deductible and Out-of-Pocket Limits

Earlier this year, in Revenue Procedure 2026-24, the IRS announced the inflation adjusted amounts for health savings accounts (HSAs) and high deductible health plans (HDHPs).

The Affordable Care Act’s (ACA) out-of-pocket limits for in-network essential health benefits have also been announced and have increased for 2027. Note that all non-grandfathered group health plans must contain an embedded individual out-of-pocket limit if the family out-of-pocket limit is above $12,000 (2027 plan years). Exceptions to the ACA’s out-of-pocket limit rule are available for certain small group plans eligible for transition relief (referred to as “Grandmothered” plans). While historically the Centers for Medicare & Medicaid Services (CMS) has renewed the transition relief for Grandmothered plans each year, it announced in March 2022 that the transition relief will remain in effect until it announces that such coverage must come into compliance with the specified requirements.

ACA Reporting Penalties (Forms 1094-B, 1095-B, 1094-C, 1095-C)

The table below describes late filing penalties for ACA reporting. The 2028 penalty is for returns filed in 2028 for calendar year 2027, and the 2027 penalty is for returns filed in 2027 for calendar year 2026. Note that failure to issue a Form 1095-C when required may result in two penalties, as the IRS and the employee are each entitled to receive a copy.