December 6, 2021

Volume XI, Number 340

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December 03, 2021

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ARPA Provides Welcome Change for Participants in Dependent Care FSAs

One of the changes included in the American Rescue Plan Act of 2021 (the “Act”) is a temporary increase to the annual limit on pre-tax contributions to a dependent care flexible spending account (“DCFSA”) that can be excluded from income. For single taxpayers and married couples filing jointly, the limit increases to $10,500 (from $5,000) and for married individuals filing separately, the limit increases to $5,250 (from $2,500).  This change is effective for plan years beginning after December 31, 2020 and before January 1, 2022.

Employers who intend to amend their DCFSAs to permit carryover of unused deferrals from 2020 to 2021 pursuant to the Consolidated Appropriations Act, 2021 will welcome this change, as it provides certainty that any carryover amount will not be treated as taxable income to the participant. Prior to the Act, it was not clear whether DCFSA reimbursements for services incurred during a year in excess of the maximum exclusion would be subject to inclusion in taxable income.

To take advantage of the relief provided by the Act, employers must amend their DCFSAs by the last day of the plan year in which the amendment is effective, which would be December 31, 2022 for calendar year DCFSAs.

©2021 Epstein Becker & Green, P.C. All rights reserved.National Law Review, Volume XI, Number 83
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About this Author

Sharon Lippet, Epstein Becker Law Firm, Employee Benefits Attorney
Member

SHARON L. LIPPETT is a Member of the Firm in the Employee Benefits practice, in the New York office of Epstein Becker Green. She has substantial experience in matters relating to tax-qualified and nonqualified retirement plans, welfare plans, cafeteria plans, fiduciary matters, and plan asset entities. Her practice focuses on the design, establishment, communication, and legal compliance of compensation and benefit arrangements, including non-qualified deferred compensation plans and qualified retirement plans.

212-351-4630
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