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.
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.