The American Rescue Plan Act of 2021 (ARPA), signed into law on March 11, 2021, permits employers to increase the annual limit on contributions to Dependent Care Flexible Spending Accounts.
The new Dependent Care FSA annual limit for 2021 pretax contributions increases to $10,500 (up from $5,000) for single taxpayers and married couples filing jointly, and to $5,250 (up from $2,500) for married individuals filing separately.
Below are some items to consider if you are interested in amending your plan for 2021 to include the new Dependent Care FSA limit of $10,500.
Prospective Changes – The separate, but related Consolidated Appropriations Act signed on December 27, 2020, permitted employers to amend their plan for 2021 to allow prospective election changes for 2021 without a qualifying life event. Should an employer choose to implement the new Dependent Care FSA maximum, it would also make administrative sense to also allow prospective changes. Otherwise, only newly hired employees or employees experiencing a qualifying life event would be able to take advantage of the revised maximum.
Nondiscrimination Testing – Employers should be aware that nondiscrimination testing issues may result from adopting the higher limit – especially for those employers who have had trouble passing nondiscrimination testing in the past. Allowing all employees to contribute additional funds up to the new maximum may have further negative impacts on testing results and corrective actions.
Proration For Non-Calendar Year Plans – Contribution limits for plans beginning in 2021, but ending after January 1, 2022, are subject to proration. Assuming the annual limit will revert back to $5,000 in 2022, the full $10,500 limit cannot be elected for plans that extend past 2021.
The example provided below is based on a plan that begins on April 1, 2021 and ends on March 31, 2022.
The information provided here is of a general nature and is not intended to address the specific circumstances of any individual or entity. In specific circumstances, the services of a professional should be sought. Tax information, if any, contained in this communication was not intended or written to be used by any person for the purpose of avoiding penalties, nor should such information be construed as an opinion upon which any person may rely. The intended recipients of this communication and any attachments are not subject to any limitation on the disclosure of the tax treatment or tax structure of any transaction or matter that is the subject of this communication and any attachments.