Finally—Additional Relief for Dependent Care Assistance Programs Due to COVID-19

[Update: IRS Notice 2021-15, which was released on March 2, 2021, clarifies the application of the Consolidated Appropriations Act, 2021, on dependent care assistance programs under Section 125 cafeteria plans.]

At last, there is legislation to help plan sponsors and participants with leftover questions from 2020 on dependent care assistance programs (DCAPs)! The Consolidated Appropriations Act, 2021 (CAA)—signed into law on December 27, 2020—outlines temporary options for DCAPs and health care flexible spending accounts (HCFSAs), expanding on the relief the IRS published in May 2020. The CAA provisions are optional for plan sponsors to adopt.

Finally—Additional Relief for Dependent Care Assistance Programs Due to COVID-19

How does the CAA affect dependent care assistance programs?

Changes under the CAA expand on those previously addressed in IRS Notice 2020-29 released on May 12, 2020.  Below are the main features of the new law, which enables participants to use or roll over remaining plan balances from 2020.

Expanded Carryovers

If a plan permits carryovers, plan sponsors can further amend language to allow all unused funds in the 2020 and 2021 plan years to be carried over into the next plan year.


Extended Grace Periods

In plans with a grace period, the grace period for unused 2020 and 2021 plan year funds can be used in the next plan year and extended to 12 months after the end of the plan year.

Dependent Age Change

Normally, dependent care expenses for a child are only reimbursable for children up to age 13 (except in cases of incapacity). The CAA permits reimbursements for dependent children until age 14 during the 2020 plan year. For the 2021 plan year, a DCAP participant may receive reimbursements for expenses for children up to age 14, but only if the participant had unused funds in their account at the end of the 2020 plan year.

Temporary Change in Election Amount

Under the CARES Act, a DCAP could permit employees to make a prospective change in their election for the 2020 plan year without a qualifying mid-year change in status. The CAA extends this option to the 2021 plan year.

Bottom Line of the New Guidance for DCAPs

If adopting the new plan options, changes to the plan must be made by the end of the calendar year starting after the end of the plan year when the amendment became effective.  For example:

  • changes effective for the 2020 plan year need to be adopted by December 31, 2021
  • changes effective for the 2021 plan year need to be adopted by December 31, 2022.

Plan sponsors should review the requirements and timing issues with their service providers so that changes can be effectively administered when adopted. In addition to the practical, day-to-day considerations, discussions should include any legal issues that may arise.

Plan sponsors should also have a communication plan ready for participants whether they decide to revise the plan, whether they are still contemplating changes or whether no changes will be made.  If they are still in the process of considering what to do, it would be helpful to inform participants that a new law exists and that the plan is still under review.

If moving forward with changes, plan sponsors should remember to update their Section 125 cafeteria plan language and supply participants with a summary of material modification, including the revisions. Participants should also be made aware that the flexibility for these changes will not apply to plan year 2022 at this time.

Anne Newhouse, CEBS
Information/Research Specialist at the International Foundation of Employee Benefit Plans

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