American Rescue Plan Act Increases Dependent Care FSA Contributions

New contribution limits for the 2021 calendar year

A dependent care FSA is a pretax benefit account used to pay for services such as day care, preschool, summer camps, and before or after-school programs. Funds may be used for expenses relating to children who are under the age of 13 or incapable of self-care and who live with the FSA holder more than half the year. Elder care may be eligible for reimbursement with a dependent care FSA if the adult lives with the FSA holder at least eight hours of the day and is claimed as a dependent on the FSA holder’s federal tax return.

The American Rescue Plan Act (ARPA) raises pretax contribution limits for dependent care flexible spending accounts (DC-FSA) for the 2021 calendar year. The new DC-FSA annual limits increases to $10,500 (up from $5,000) for single taxpayers and married couples filing jointly, and to $5,250 (up from $2,500) for married individuals filing separately.

Congress and the IRS have provided other DC-FSA relief. The Consolidated Appropriations Act, 2021 (CAA) allows employers that sponsor health or dependent care FSAs to permit participants to roll over all unused amounts in these accounts from 2020 to 2021 and from 2021 to 2022. IRS Notice 2021-15 clarifies that employers may extend the dependent care FSA claims period for a dependent who “ages out” by turning 13 years old during the COVID-19 public health emergency.

KRS professionals are available to assist with tax planning related to dependent tax credits. Please contact us if you have any questions, concerns, or need advisement during this unprecedented time. Visit the KRS Coronavirus Resources Page for additional information on tax changes made by the ARPA.