Q: Our Dependent Care FSA runs on a July 1-June 30 plan year. We have an employee who started participating in July 2025. She wants to make the full $5,000 annual contribution in 2025 and make the increased $7,500 contribution in 2026. Our plan requires contributions on a per-pay basis. Can we let her contribute the full $5,000 amount in 2025?
A.- Your plan requires elections to be made for each plan year with contributions on a pro-rata basis each pay period in accordance with Prop. Treas. Regulation section 1.125-5(g)(2). This regulation permits plans to establish any contribution interval (such as per pay period) provided that “The interval specified in the plan must be uniform for all participants.” Because the plan operates on a fiscal-year schedule, contribution amounts cannot be adjusted mid-year to align with the calendar year.
The IRS sets the DCFSA annual contribution limit on a calendar-year (January through December) basis. For participants who elect the maximum amount in consecutive plan years, the total contributions across the two plan years will equal the calendar-year maximum. For example, if your employee participated in the DCFSA and elected the maximum contribution for both the 2024–2025 and 2025–2026 plan years, payroll deductions from January through June 2025 would reflect half of one plan year ($2,500), and deductions from July through December 2025 would reflect half of the next plan year ($2,500) together reaching the $5,000 IRS limit for tax year 2025.
The recently announced increase to the DCFSA annual limit may apply to plan years beginning on or after January 1, 2026. As an employer, you will have to determine if you want to adopt the new limit for the plan year beginning July 1, 2026, and you should communicate any updates prior to the 2026 open enrollment period.
The plan should not permit in individual to accelerate the timing of contributions during the current plan year. Making such a change could cause the plan to fall out of compliance with IRS requirements.
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This article is for informational purposes only and is not intended as legal, tax, or benefits advice. Readers should not rely on this information for taking (or not taking) any action relating to employment, compliance, or benefits. Always consult with a qualified professional before making decisions based on this content.
