The American Rescue Plan Act of 2021 (ARPA) was signed into law on March 11, 2021. See our recent blog where we discuss the COBRA subsidy. In the ARPA bill, there is a significant change for dependent care flexible spending accounts.Subscribe
The Law Change
For calendar year 2021 only, the dependent care flexible spending account (DCFSA) annual salary reduction limit is increased from $5,000 to $10,500. For married individuals filing separate tax returns, the limit is increased from $2,500 to $5,250. This provision is optional for employers; they are not required to increase the limits.
Changing Elections in 2021
If employers implement this change, employers will want to implement the Consolidated Appropriations Act (CAA) provision that allows DCFSA election changes for any reason. See our prior blog where we discuss allowable changes with HFSA and DCFSA elections for plan years ending in 2021.
CAA Extended Grace Periods or Carryovers
Under another provision of CAA, employers may allow carryovers or an extended grace period for health flexible spending accounts (HFSA) and DCFSA balances remaining as of the end of the 2020 plan year to the plan year ending in 2021. Likewise, employers may extend the grace period or allow carryovers of unspent FSA balances remaining at the end of the plan year ending in 2021 to the end of the plan year ending in 2022. If employers implement this change, they should consider rolling over DCFSA balances from 2021 to 2022 so that employees do not forfeit any unspent amounts.
Off-Calendar Year Plans
The $10,500 maximum election for 2021 is based on a calendar year. For off-calendar plan years, this increase will present a challenge for participants not to exceed $5,000 (or $2,500 for married filing separately) in 2022. Under CAA, employees may change their annual elections for plan years ending in 2021 only. They can elect to increase their DCFSA election through the end of the 2021 plan year and during open enrollment for the new plan year beginning in 2021 (ending in 2022), employees may change their annual elections so that they contribute the full $10,500 in calendar year 2021. However, what happens on January 1, 2022? CAA does not allow a status change for plan years ending in 2022. Can the election be decreased so that employees do not exceed $5,000 in 2022? Does the lowering of a plan limit qualify for a change in status under the change in status rules? The IRS should issue detailed guidance on these questions.
If employers wish to adopt this optional change, they will need to amend their cafeteria plan documents. The amendment must be signed no later than the end of the plan year beginning in 2021.
We believe most employers will want to implement this change and if they do, they should allow CAA election changes and implement the CAA carryover or extended grace period into 2022 (at least for the DCFSA). Off-calendar year plans will need to proceed with no guidance on what happens starting in January 2022, but the IRS will more than likely provide guidance on this matter.
TRI-AD is working quickly to implement this provision to allow eligible employees the opportunity to save more tax dollars with an increased DCFSA limit.
TRI-AD and our Associates’ suggestions or recommendations shall not constitute legal advice. No content on our website can be construed as tax or legal advice and TRI-AD may not be considered your legal counsel or tax advisor. Clients are encouraged to consult with their tax advisor and/or attorney to determine their legal rights, responsibilities, and liabilities. This includes the interpretation of any statute or regulation, federal, state or local; and/or its application to the clients’ business activities.