The IRS announced in Revenue Procedure 2025-32 the 2026 inflation adjustments that will apply to certain fringe benefits and other payroll-related provisions.

Educational assistance made permanent

Section 70412 of the OBBBA amended IRC Section 127(c)(1)(B) to make permanent the exclusion for employer payments of qualified education loans. For tax years beginning after 2026, the maximum exclusion amount of $5,250 will be adjusted for inflation. (See Tax Alert 2025-1476.)

Dependent care assistance limit goes up in 2026

Although not included in Revenue Procedure 2025-32, employers should note that under the OBBBA, and effective January 1, 2026, the maximum amount that employees can exclude from gross income under IRC Section 129 for dependent care assistance is increased from $5,000 to $7,500, which will not be indexed for inflation. (See Tax Alert 2025-1476.)

Medical Savings Accounts (MSA) limits go up in 2026

Summarized below are the 2026 limits that apply to MSAs under IRC Section 220(c)(2)(A).

Adoption assistance limit goes up in 2026

The limit on qualified adoption assistance (including benefits provided for children with special needs) under IRC Section 137 for 2026 is $17,670, up from $17,280 in 2025.

For 2026, the amount excludable from an employee's gross income begins to phase out under IRC Section 137(b)(2)(A) for taxpayers with modified adjusted gross income (AGI) of more than $265,080 and is completely phased out for taxpayers with modified AGI of $305,080 or more.

Health flexible spending arrangement (FSA) limit goes up in 2026

The 2026 annual limit on pretax contributions employees can make toward their health FSA through a cafeteria plan under IRC Section 125(i) is $3,400, up from $3,300 in 2025. If the cafeteria plan permits the carryover of unused amounts, the maximum carryover amount is $680, up from $660 in 2025.

Transportation fringe benefits (parking and transit) limit goes up in 2026

The 2026 monthly limit on parking benefits under IRC Section 132(f)(2)(B) is $340, up from $325 in 2025.

The 2026 aggregate monthly limit for transportation in a commuter highway vehicle and any transit pass under IRC Section 132(f)(2)(A) is also $340, up from $325 in 2025.

Foreign earned income exclusion for 2026

For tax years beginning in 2026, the foreign earned income exclusion amount under IRC Section 911(b)(2)(D)(i) is $132,900, up from $130,000 in 2025.

Threshold for requirement to issue and file Forms 1099

Under the OBBBA, for payments made after December 31, 2025, the base threshold under IRC section 6041(a) that triggers the requirement to issue and file Forms 1099 (e.g., Form 1099-MISC and Form 1099-NEC) and backup withholding under section 3406(b)(6) is increased from $600 to $2,000. This amount is adjusted for inflation for returns required to be filed in calendar year 2027.

Reporting penalties for Forms W-2/1099 increase for tax year 2026

The penalties that apply to late or incorrect Forms W-2 are indexed each year for inflation. The following penalties apply to late or incorrect Forms W-2 required to be furnished to employees and/or filed with the Social Security Administration for tax year 2026 (filed in 2027).