Dependent Care FSA Maximum Increase
On March 11, 2021, the American Rescue Plan Act of 2021 (ARPA) was signed by President Biden. ARPA is a $1.9 trillion economic stimulus package proposed by Biden to speed up the United States' recovery from the economic and health effects of the COVID-19 pandemic.
ARPA Allows an Increase in Dependent Care FSA maximum!
For the 2021 calendar year only, ARPA increases the DCA from $5,000 to $10,500 (from $2,500 to $5,250 in the case of a separate return filed by a married individual) the maximum amount that can be excluded from income under Section 129 of the tax code for qualifying dependent care expenses. Employers who sponsor dependent care flexible spending arrangements may amend their plans on or before the last day of the plan year to allow their eligible employees to benefit from this increased limit. Fiscal plan year sponsors will need to consider how to implement the relief given their plan year limits, noting that the increased contribution limit ends on December 31, 2021. The Consolidated Appropriations Act, 2021, permits employers to amend their Section 125 plans to permit mid-year election changes when the same normally would not be permitted. That relief will need to be implemented in tandem with any increased limits allowed under ARPA. For employers who decide not to increase the dependent care flexible spending account limit for 2021, employees still may qualify for the child and dependent care tax credit that was substantially enhanced and made refundable for 2021.
What will happen from here?
- HRCTS will update all Dependent Care FSA Plans in our system so that an election can be processed for up to a maximum of $10,500 instead of $5,000. If you do not want HRCTS to increase your maximum, please contact your Account Management team by 3/31/21.
- You will want to notify your employees about the increase in the Dependent Care Maximum. A sample notice will be provided to Employers for use when notifying participants of this change and will be made available next week.
- You can accept election changes from your employees who would like to make a change and work with your payroll department to make any adjustments to payroll deductions.
- Send any election changes to HRCTS for processing.
- HRCTS will amend your plan documents allowing this change.
Please note that while we wanted you to be aware of the provisions in the law and have a chance to consider them, the law is quite voluminous and additional IRS guidance may be forthcoming. In addition, HRCTS cannot provide legal or tax advice regarding this law or its requirements. For those questions, you should consult your own counsel. HRCTS will continue to keep you updated on any new changes to the law affecting the benefit plans we are administering for you.