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Dependent Care FSA Limit Increase

Written by Aimee Reynard
Updated 2 months ago

The legislation also includes a voluntary one year increase to the annual dependent care FSA contribution limit. Employers who want to offer the limit increase to their employees must amend their plan documents.

  • For calendar year 2021, the dependent care FSA limit is increased to $10,500 or $5,250 for married individuals filing separately.
  • ARPA automatically sunsets this increase at the end of the 2021 calendar year.
  • Nondiscrimination Testing: An employer must amend the DCAs by 12/31/2021 if implementing the increase and must administer the plan consistently from the intended effective date through the amendment adoption date. Most DCAs annually fail their Internal Revenue Code nondiscrimination requirements. This may be more likely for 2021, since the ARPA also improves the competing dependent care tax credit. Adopting the increased $10,500 maximum for 2021 may result in larger corrections for highly compensated DCA participant employees. Please click here for additional guidance on how to complete nondiscrimination testing for your DCA plan.

IMPORTANT NOTE for NON-calendar year DCA plans: The total DCA contributions for the calendar year 2021 would need to be monitored by the employer so employees do not contribute more than $10,500 within the 2021 calendar year, even if the plan year overlaps 2021 and 2022. Ameriflex would need to be notified of any contribution changes to the 2022 plan year if the employee has contributed $10,500 for 2021, so employees’ accounts are not overfunded starting 2022 or in 2021. If employers with NON calendar year DCA plans wish to increase the 2021 maximum, employers will strongly want to consider prorated reimbursement limits for expenses incurred during the 2022 portion of the 2021-2022 plan year. The employer will be responsible for ensuring that no employee exceeds the maximum amount for the year as any excess contribution would need to be reported as taxable income. For these reasons, Ameriflex does not recommend NON-calendar year plans adopt this increase since it places additional risk and monitoring by the employer to remain in compliance with the regulations.

Below we have outlined some of the reasons that Ameriflex is advising against making this change:

  • The change is only allowable until 12/31/2021 and therefore it will require the employer to make considerable updates to employee accounts/deductions on 12/31/2021 to prevent over contribution in 2022 when the provision ends. Ameriflex does offer self service tools to make these updates, however it would be additional administrative work for the employer.
  • It will require employers to monitor employee payroll contributions to ensure that no one over contributes in 2021 or 2022. Please review the employer requirements for monitoring employee contributions here.
  • If you were to stop deductions as of 12/31/2021 for those taking the increase, you would need to do that for all participants in the DCA plan as the IRS only allows the acceleration of benefits if it is for all participants on the plan. Therefore, someone that did not want to increase their contribution would be forced to accelerate their benefit if even one person in the plan was in the position to accelerate their benefit. 

While it is our recommendation that non-calendar plan years not offer this change for the above reasons, we understand that some employers may still wish to proceed. 

If that is the case, please complete the link here to request this update to our system. If you will follow Ameriflex’s recommendation and not make any changes, nothing further is needed.

Important information before submitting your change request:

  • Submit one form per employer group in our system.  
  • You will need your employer’s AMFcode to complete the form.  Your unique AMFcode can be located in the Employer Portal general page, next to your employer name, under the General Tab. It will begin with the letters “AMF.” Please enter the entire 9-digit code. You can also find this on your Monthly Admin Invoices located on the Invoices/Reports tab in the Employer Portal
  • Click here for additional guidance on how to complete nondiscrimination testing for your DCA plan. It is recommended to run testing before making the final DCA election changes.
  • To update your plan documents, click here. Ameriflex does not need a copy of the updated amendment page. Adopting the increased $10,500 maximum for 2021 may result in larger corrections for highly compensated DCA participant employees. 

Once the form is submitted please allow up to 2 business days for updates to be made. Employers can begin submitting participant change requests as follows:

  • Ameriflex Employer Portal - To submit DCA election changes, please log into our Ameriflex Employer Portal to submit your employees’ change requests. Click here for additional guidance on how to submit mid year election changes.  
  • Electronic Data Interchange (EDI) - If you are an employer sending DCA information via EDI, please contact your EDI vendor to send your participant change requests on your next file feed. Participant DCA changes would need to be captured on the file to ensure accuracy of information in our system.  

Changes for the 2021 plan year need to be adopted by 12/31/2021. 

We ask that you please only submit one form per employer group, and note that you will need your AMFcode when completing the form. Your unique AMFcode can be located in the Employer Portal general page, next to your group name, under the General Tab. It will begin with the letters “AMF.” Please enter the entire 9 digit code. You can also find this on your Monthly Admin Invoices located on the Invoices/Reports tab in the Employer Portal

EMPLOYER ACTION ITEMS: Please read all prior to submitting your change  

  1. Plan Documents:  To update your plan documents, click here. No amendment fees will apply. Ameriflex does not need a copy of the updated amendment page, however, employers should sign and date this page and keep it for their records and distribute to plan participants.
  2. Nondiscrimination Testing:  An employer must amend the DCAs by 12/31/2021 if implementing the increase and must administer the plan consistently from the intended effective date through the amendment adoption date. Most DCAs annually fail their Internal Revenue Code nondiscrimination requirements. This may be more likely for 2021, since the ARPA also improves the competing dependent care tax credit. Adopting the increased $10,500 maximum for 2021 may result in larger corrections for highly compensated DCA participant employees.  Please click here for additional guidance on how to complete nondiscrimination testing for your DCA plan.

Please allow up to 2-3 business days for updates to be made once the form is submitted. After waiting 2-3 business days, employers can begin submitting participant change requests as follows:

  • Ameriflex Employer Portal - To submit DCA election changes, please log into our Ameriflex Employer Portal to submit your employees’ change requests.   Click here for additional guidance on how to submit mid year election changes.  
  • Electronic Data Interchange (EDI) - If you are an employer sending DCA information via EDI, please contact your EDI vendor to send your participant change requests on your next file feed.    Participant DCA changes would need to be captured on the file to ensure accuracy of information in our system. 

We are actively working on the operational procedures to accommodate the ARPA legislative updates and will communicate next steps to our clients and partners soon.

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