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2021 Dependent Care FSA Limit Increase Details

2021 Dependent Care FSA Limit Increase Details

The American Rescue Plan Act of 2021 introduced multiple provisions to provide assistance to organizations and individuals who have been impacted by COVID-19. One of those provisions included changes to dependent care FSA rules and limits, providing more flexibility for employers and their employees to use their funds. Read on for more details about what those changes are.

 

What are Dependent Care FSAs?

General flexible spending accounts (FSAs) allow employees to set aside pre-tax funds for healthcare expenses or dependent care expenses. Employees decide how much is put into their FSA, up to a limit. 

Dependent care FSAs are for expenses must be work-related to qualify – in other words, you must pay them so you (and your spouse if filing jointly) can work or look for work. This includes everything from before school or after school care and licensed day care centers and nursery schools, to qualifying care for dependent adults and summer day camps.

 

Why Were Changes Made to Dependent Care FSAs?

Throughout the year, many FSA and dependent care FSA owners didn’t use their funds as expected in 2020.

For example, it’s common for employees to use FSA funds to pay for childcare services. During the pandemic, countless people worked from home and many opted to watch their children instead of sending them to daycare. Some childcare services were closed for significant portions of the year as well. 

Unlike most health savings account (HSA) funds, FSA dollars tend to expire at the end of the calendar or plan year. Thanks to this convergence in conditions, many employees faced losing their contributions for the year until Congress intervened in late December 2020 with the CAA.

 

What is the Maximum Dependent Care FSA Contribution for 2021?

First announced in January 2021, the American Rescue Plan Act of 2021 (ARPA) is the new relief package designed to assist Americans and industries that have been negatively impacted by the ongoing pandemic. President Biden signed the bill into law on Thursday, March 11.

One of the provisions included in ARPA temporarily increased the limits on dependent care FSAs for 2021. Now, single filers can contribute up to $5,250 (increased from $2,500) and married couples filing jointly can contribute up to $10,500 (increased from $5,000). Health FSA limits remain unchanged. 

According to SHRM, these limits apply to the plan year starting after Dec. 31, 2020, and before Jan. 1, 2022.

 

Why Were Changes Made to Dependent Care FSAs?

In December 2020, the 2021 Consolidated Appropriations Act (CAA) was signed into law and introduced new optional FSA provisions that grant employees improved account flexibility in the new year—including key updates to health FSA and dependent care FSA funds and claims. 

Thanks to the CAA, employers have the option to make FSAs and dependent care FSAs friendlier for employees. If employers opt to offer it, for dependent care FSAs, changes include the carryover for unused funds, the extension of grace periods, and contribution adjustments, as well as a carry-forward option for dependents who have aged out of the qualified dependent care range. Now, reimbursement expenses can be permitted for children up to age 14 instead of up to age 13.

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