ARPA and Increased Dependent Day Care FSA Limit

Posted by BAS - 18 March, 2021

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The American Rescue Plan Act of 2021 (“ARPA”) temporarily increases the maximum amount that may be excluded from taxable income under a dependent day care flexible spending account plan. The maximum limit for the 2021 tax year is $10,500 for unmarried individuals or individuals filing a joint tax return and $5,250 for married individuals filing separately. The increase is for 2021, only. 

A dependent day care FSA permitted, but not required, to increase the maximum contribution limit. A plan may, but does not have to, allow participants to make mid-year changes to increase their DFSA elections.

The increased limit addresses the unintended tax consequences of prior guidance that allowed for carryovers and extended grace periods under a dependent day care FSA. A plan that allows dependent day care FSA participants to use 2020 unreimbursed amounts in a 2021 grace period or allows 2020 unused funds to be carried over to 2021 could cause employees to exceed the prior ($5,000) maximum tax exclusion. The IRS did not address the tax exclusion of the carryover/extended grace period in the prior guidance. With the new limit in ARPA, an employee that is reimbursed from 2020 funds in the 2021 tax year will have less of a risk of exceeding the permitted dependent day care tax exclusion.

Incorporating the increased limit is optional for a dependent day care FSA, as is allowing participants to make mid-year changes to increase their dependent day care FSA election. A plan that adopts the increased maximum permitted exclusion limit and allows participants to increase elections must be amended by the last day of the 2021 plan year, may allow reimbursements of expenses back to 1/1/2021, and must be operated consistently with the terms of the amendment.

Topics: HR & Benefits Compliance, HR & Benefit Plans, HR & Benefits News, Technology News


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