The American Rescue Plan Act of 2021 includes an optional (but not required) temporary change for the calendar year of 2021 to increase the maximum pretax contribution limit from $5,000 to $10,500 for dependent care assistance programs (DCAPs). For individuals who are married but filing separately, the amount increases from $2,500 to $5,350.
Plan sponsors that want to allow this increase will need to amend their DCAP plan by the end of the 2021 plan year and notify participants of the increased limit as soon as possible. This amendment will be retroactive back to January 1, 2021 for calendar year plans.
If a plan sponsor does not choose to amend their plan, employees may be eligible for dependent care tax credits that the individual taxpayers would claim for the 2021 tax year.
If plan sponsors have already completed their annual 2021 enrollments, the Consolidated Appropriations Act, 2021 (CAA) provisions permit (but do not require) employers to let employees make midyear changes to their DCAP contributions for plan years ending in 2020 or 2021, even without an event such as the birth of a child or a significant change in childcare costs.
The IRS is still expected to clarify whether employees can increase DCAP contributions under the temporary special rules outlined in IRS Notice 2021-15, which were just released on March 2, 2021.
Legal experts are cautioning that some employers might run into unintended nondiscrimination rule consequences by allowing the increased limit and should therefore closely monitor and test their plan.
It is also still unclear whether amounts from a 2020 carryover or grace period would count toward the total 2021 amount that may be reimbursed on a tax-favored basis under the American Rescue Plan Act. We are awaiting additional IRS guidance to spell out the rules on how this would work.
Previous DCAP Changes
In addition to this new guidance, there have been a lot of changes to DCAPs lately; we published a summary of changes under the CAA just in January of this year. Briefly, they include:
- Expanded Carryovers: Plan sponsors can amend language to allow all unused DCAP funds in the 2020 and 2021 plan years to be carried over into the next plan year.
- Extended Grace Periods: 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: The CAA permits reimbursements for dependent children until age 14 during the 2020 plan year (increased from age 13). For the 2021 plan year, a DCAP participant may also 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.
You can find the full blog on these changes initiated by the Consolidated Appropriations Act, 2021 (CAA) here.
Additional DCAP Resources
Notice 2020-29 – COVID-19 relief for elections under Section 125 Cafeteria Plans and Extended Claims Period for DCAPs, Internal Revenue Service, May 12, 2020.
Tax Changes for Childcare May Present DCAP Challenges, Segal, March 17, 2021.
Anne Newhouse, CEBS
Information/Research Specialist at the International Foundation of Employee Benefit Plans
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