Below, we provide background on COLA, how the adjustments are calculated, and any changes to the 2026 thresholds.<\/p>\n\n\n\n
What is a COLA?<\/h2>\n\n\n\n
COLA, or Cost-of-Living Adjustments, are increases designed to help wages, salaries, or benefits keep pace with inflation. They\u2019re most commonly associated with Social Security, but you\u2019ll also see them in union agreements, pensions, and even some private-sector pay structures.<\/p>\n\n\n\n
The idea behind COLA is simple: as the cost of goods and services rises\u2014things like housing, food, and healthcare\u2014people need their income to stretch just as far. These adjustments are usually tied to measures like the Consumer Price Index (CPI), which tracks changes in the cost of everyday essentials.<\/p>\n\n\n\n
For example, if inflation bumps the cost of living by 3%, a 3% COLA ensures folks can still afford what they need. It\u2019s especially important for retirees or anyone on a fixed income who can\u2019t easily adjust their earnings to match inflation.<\/p>\n\n\n\n
How Are Cost-of-Living Adjustments Calculated?<\/h2>\n\n\n\n
COLA aren\u2019t one-size-fits-all; instead, they can be calculated using different methods depending on the audience and purpose. <\/p>\n\n\n\n
Here\u2019s a breakdown of the most common approaches:<\/p>\n\n\n\n
Consumer Price Index (CPI)<\/h3>\n\n\n\n
This is one of the most widely used tools for calculating COLA, especially in the private sector. The Bureau of Labor Statistics (BLS) determines the CPI based on a basket of goods and services that the average household uses, such as housing, groceries, transportation, and healthcare. They track the average prices of these items and calculate changes monthly and annually.<\/p>\n\n\n\n
What\u2019s helpful for businesses and HR teams is that CPI data isn\u2019t just national\u2014it\u2019s broken down by region (South, West, Midwest, and Northeast). <\/p>\n\n\n\n
Worth Noting: <\/strong>The regional breakdown can be critical if your organization operates in multiple locations, giving you a more precise picture of cost-of-living changes in each area. Due to its comprehensiveness and accuracy, many consider the CPI the gold standard for cost-of-living calculations.<\/p>\n\n\n\n The Social Security Administration (SSA) relies on the CPI-W for its annual adjustments to Social Security and Supplemental Security Income (SSI) benefits. Like the CPI, the CPI-W measures changes in the prices of goods and services, but it focuses on a narrower audience: urban wage earners and clerical workers.<\/p>\n\n\n\n Worth Noting:<\/strong> The methodology is identical to the CPI, but the data set focuses on costs experienced by this targeted group. This calculation reflects the spending patterns of a specific subset of workers, which can be especially relevant for organizations with a similar workforce demographic. <\/p>\n\n\n\n Think of the CPI-U as the big-picture version of the CPI-W. It measures price changes for the same goods and services but casts a wider net, including retirees, self-employed professionals, temporary workers, and technical employees. The CPI-U represents about 93% of the total U.S. population, making it the broadest measure of cost-of-living changes.<\/p>\n\n\n\n Worth Noting:<\/strong> For organizations with diverse workforces, the CPI-U may be the most relevant index to consider when planning salary adjustments or budgeting for benefits. Its broader demographic coverage means it captures a more inclusive snapshot of how inflation impacts employees.<\/p>\n\n\n\n Over 72.5 million Americans’ Social Security and Supplemental Security Income benefits will increase by 2.8% in 2026. <\/p>\n\n\n\n There are also other adjustments to benefits, including the following:<\/p>\n\n\n\n The contribution limits for HSAs<\/a> for 2026 were announced earlier this year. The annual contribution limit for individual coverage is increasing by $100, to $4,400. The annual contribution limit for family coverage is increasing by $200, to $8,750. The catch-up contribution limit for those aged 55 and older will remain $1,000.<\/p>\n\n\n\n For 2026, the dollar limit on employee salary reduction contributions to FSAs<\/a> is $3,400 (up from last year\u2019s cost of $3,300). Additionally, 2026 health FSAs may permit a maximum rollover of up to $680 into the following plan year (up from $660).<\/p>\n\n\n\n The monthly limit for transit\/parking benefits<\/a> is increasing to $340 in 2026 (up from $325). <\/p>\n\n\n\n For 2026, the maximum amount of payments and reimbursements under a QSEHRA<\/a> can\u2019t exceed $6,450 for individual coverage and $13,100 for family coverage.<\/p>\n\n\n\n For 2026, the average annual wage level at which the tax credit begins to phase out for eligible small employers is $34,100.<\/p>\n\n\n\n Parents and caregivers rejoice! The DCAP<\/a> limit has increased to $7,500\/$3,750 for calendar year 2026. <\/p>\n\n\n\n Want to ensure you’re making the right decisions for your organization and people, especially with COLA adjustments and other economic changes?<\/p>\n\n\n\n Look to your HR software. Specifically, it’s important to use a platform (if you aren’t already) that has forecasting features that allow you to reflect on the past and help predict the future to navigate any financial or human resource changes. <\/p>\n\n\n\nConsumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W)<\/h3>\n\n\n\n
Consumer Price Index for All Urban Consumers (CPI-U)<\/h3>\n\n\n\n
2026 COLA Adjustments and Thresholds<\/h2>\n\n\n\n
Health Savings Accounts (HSAs)<\/h3>\n\n\n\n
Health Flexible Spending Accounts (FSAs)<\/h3>\n\n\n\n
Qualified Transportation Fringe Benefits<\/h3>\n\n\n\n
Qualified Small Employer Health Reimbursement Accounts (QSEHRAs)<\/h3>\n\n\n\n
Small Business Health Care Tax Credit<\/h3>\n\n\n\n
Dependent Care Assistance Program (DCAP)<\/h3>\n\n\n\n
Leverage Technology for Financial Decisions<\/h2>\n\n\n\n
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