The just-signed American Rescue Plan Act (ARPA) contains several provisions to help multi-employer and single employer plans fund retiree benefits. Two less-noticed provisions greatly increased flexible spending accounts (FSAs) for dependent care, but only for 2021.
The following will address the increased limits for dependent care exclusions:
To the extent children get back into school or daycare in 2021, and their care is needed to allow the parents to work, these increases could be valuable. It remains to be seen if efforts will be made to make these increases permanent.
The dependent care exclusion is also sharply increased for 2021 only, to $10,500 ($5,250 if married filing separately). ARPA provides that a cafeteria plan will not be in violation of the applicable rules if it is amended retroactively by the last day of the plan year in which the amendment is effective and operates consistently with the amendment.
Presumably this is intended to allow plans to let participants immediately increase the amount that they had previously elected to defer to a dependent care account for 2021, in order to take advantage of the increased exclusion. Participants who carried over unused amounts from 2020 to 2021 will also be able to take advantage of the higher exclusion for reimbursements in 2021.
Although the use-it-or-lose-it rule poses a risk to amounts deferred into a dependent care account, the Consolidated Appropriations Act of 2021 also allows a plan to adopt an unlimited carryover of unused amounts from 2021 to 2022. Besides the income tax savings from this exclusion, salary reductions through a cafeteria plan are also excluded from FICA tax (for both the employee and employer).
For the dependent care exclusion, employers should consider whether a plan amendment is needed to increase the dollar limit (if it is specified rather than just linked to the statutory limit) and to allow mid-year election changes. Also, employers with a dependent care account are required to explain the alternative of using the child care tax credit, so that explanation should be supplemented even if the dependent care plan is not changed.
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