Increased FSA Limits for 2026: Nondiscrimination Testing Risk and Compliance Considerations

Recent legislation under the One Big Beautiful Bill Act of 2025 (the “OBBBA”) increased contribution limits for Health Flexible Spending Accounts (“FSAs”) and Dependent Care FSAs (“DCFSAs”) beginning in 2026. While these increases expand tax-advantaged savings opportunities for employees, they also increase the risk of nondiscrimination testing (“NDT”) failures—particularly for employers with workforces or plan populations that include a disproportionate concentration of individuals treated as “highly compensated” under applicable nondiscrimination rules, as determined under the Internal Revenue Code (“IRC”) §§ 125, 105(h), and 129 as applicable.

SUMMARY 

Health FSAs and Limited-Purpose FSAs

Health FSAs, including limited-purpose FSAs (“LPFSAs”), are subject to multiple nondiscrimination testing regimes regardless of size. Under IRC Section 125, all health FSA and LPFSA elections are tested together as part of the employer’s cafeteria plan. These tests include: (1) the Eligibility Test, (2) the Contributions and Benefits Test, and (3) the Key Employee Concentration Test. All three must be passed to satisfy NDT compliance requirements.

Both Health FSAs and LPFSAs are also treated as self-insured medical reimbursement plans under IRC Section 105(h). Each arrangement must independently satisfy: (1) the Eligibility Test, and (2) the Benefits Test. Each test must be passed to satisfy IRC Section 105(h) nondiscrimination rules.

Dependent Care FSAs

DCFSAs are subject to more challenging nondiscrimination testing under IRC Section 129. These plans must satisfy all three (3) tests: (1) the Eligibility Test, (2) the Contributions Test, and (3) the Average Benefits (or 55%) Test (which incorporates ownership concentration limits). The Average Benefits Test is the most common failure point, requiring proactive monitoring to avoid NDT failures that result in the loss of pre-tax treatment for all highly compensated participants.

CONCLUSION

FSA NDT must be completed by the end of the plan year, as there is no opportunity to correct for non-compliance. An NDT failure does not disqualify a plan in its entirety. However, testing failures cause “highly compensated” individuals to lose the tax-favored treatment on affected benefits, and the value of those benefits must be reported as taxable income. Non-highly compensated individuals are not impacted by testing failures. For questions or assistance with FSA NDT, please contact your Client Manager team.

EMPLOYER CONSIDERATIONS & NEXT STEPS

• Review plan eligibility and contribution structures before implementing higher limits.
• Conduct mid-year NDT testing to identify potential failures before the end of the plan year.