American Rescue Plan Act: Increased FSA limits
One of the more noteworthy components of the American Rescue Plan Act (ARPA) – the latest COVID-19 relief legislation that was signed into law March 11 – is the increase in pretax contribution limits for dependent care flexible spending accounts (DC-FSAs) for calendar year 2021.
The DC-FSA is a pretax benefit account that can be used to pay for a variety of services like day care, preschool, summer camps, and school programs. These DC-FSA funds can be used for expenses relating to children under age 13, or those incapable of self-care who live with the FSA holder more than half the year.
Elder care may also be eligible for reimbursement with a DC-FSA if the individual 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.
Employers can also choose to contribute to employees' dependent care FSAs. However, the combined employer and employee contributions to a dependent care FSA cannot exceed the IRS limits.
New contribution limits
Under ARPA, the contribution limit for employer provided DC-FSAs is increased from $5,000 to $10,500 (or from $2,500 to $5,250 for married filing separately) for 2021.
According to Chatrane Birbal, Vice President for Public Policy at the Society for Human Resource Management (SHRM), that organization "worked with Congress to ensure maximum flexibility for dependent care FSAs. Providing this flexibility is warranted for employees since many child care services were suspended over the past year, leaving dependent care funds unused.”
For employees to take advantage, employers will need to amend their current DC-FSA. These amendments can be retroactive if adopted no later than December 31, 2021.
To amend a DC-FSA, employers will need to communicate with their plan administrator, and ensure updated elections for all DC-FSA enrollees who wish to increase their election. Employers will also need to communicate with their Payroll provider to ensure that corresponding payroll deductions are adjusted accordingly.
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Disclaimer: The information contained herein is not intended to be construed as legal advice, nor should it be relied on as such. Employers should closely monitor the rules and regulations specific to their jurisdiction(s) and should seek advice from counsel relative to their rights and responsibilities.