The limit for dependent care flexible spending accounts has been stuck at $5,000 since the account’s inception in the 1980s. But a new bill from Congress passed last week and is changing that. The American Rescue Plan Act of 2021 has affected both continuation coverage and the limit for dependent care FSAs.
What is the new limit for Dependent Care?
The first thing to know about the new temporary limit is that it only applies to plan years that start in 2021. The second thing to know is that the new DCA annual limits for pretax contributions have gone way up. The new limit for single or married and filing jointly taxpayers is $10,500 and $5,250 for married individuals filing separately, subject to certain earned-income restrictions.
Previously, the limit was $5,000 for single or if married and filing jointly, $2,500 for married individuals filing separately. It’s also worth noting that the maximum pre-tax contribution is the respective amount ($10,500 or $5,250) minus any rollover dollars.
As a reminder, earlier this year, the age limit of eligible dependents was increased from 12 to 13. Parents can submit claims for eligible expenses incurred in 2020 and 2021 related to care for children under age 14. In the case of children who turn 14 mid-year, claims can be submitted for expenses before the child’s 14th birthday.
How employees can take advantage of the changes
Assuming employers adopt the increased limit for dependent care, employees can take advantage of the new provision by updating their elections. Once elections are updated, reimbursements will still be made based on the available cash balance in the account.
Non-discrimination testing is still a factor
Employers should be aware that nondiscrimination testing issues may result from adopting the higher limit. In order to pass the non-discrimination testing, the average amount of benefits provided to Non-Highly Compensated Employees (NHCEs) must be at least 55% of the average benefits provided to Highly Compensated Employees (HCE).
Are you due for non-discrimination testing? Read our blog to learn more about what to expect.
Next steps for employers
It is advised that employers act soon. They will need to allow ample time during the year for employees to make changes to elections and per pay deductions, especially considering the high dollar amount.
Current BRI clients are advised to contact their Account Executive or Client Services Specialist to update their plan.