One of the changes included in the American Rescue Plan Act of 2021 (the “Act”) is a temporary increase to the annual limit on pre-tax contributions to a dependent care flexible spending account (“DCFSA”) that can be excluded from income. For single taxpayers and married couples filing jointly, the limit increases to $10,500 (from $5,000) and for married individuals filing separately, the limit increases to $5,250 (from $2,500). This change is effective for plan years beginning after December 31, 2020 and before January 1, 2022.
Employers who intend to amend their DCFSAs to permit carryover of unused deferrals from 2020 to 2021 pursuant to the Consolidated Appropriations Act, 2021 will welcome this change, as it provides certainty that any carryover amount will not be treated as taxable income to the participant. Prior to the Act, it was not clear whether DCFSA reimbursements for services incurred during a year in excess of the maximum exclusion would be subject to inclusion in taxable income.
To take advantage of the relief provided by the Act, employers must amend their DCFSAs by the last day of the plan year in which the amendment is effective, which would be December 31, 2021 for calendar year DCFSAs.