American Rescue Plan Increases 2021 Dependent Care Allowance to $10,500

One very short provision of the American Rescue Plan Act of 2021 (ARPA) allows up to $10,500 of dependent daycare expenses reimbursed in calendar year 2021 as non-taxable ($5,250 for those married filing separately).  Many employers recently offered a way to carry unused 2020 daycare FSA funds into 2021 via a carryover or grace period, which ensures employees don’t have to forfeit unspent funds from 2020 but would still only treat $5,000 reimbursed this year as non-taxable (so if funds from 2020 available in 2021, coupled with new contributions for 2021, exceed $5,000 in reimbursements during calendar year 2021, the employee will have the excess above $5,000 subject to taxation).  This newest relief, which is solely available for 2021, should allow the employee to treat $10,500 as non-taxable instead (or $5,250 if married filing separately).

Employers may or may not be interested in allowing another chance to enroll, or to at least to allow those with maximum elections to increase up to the new maximum (less what they brought forward from 2020).  Regardless, we do envision all employers that allowed bringing 2020 forfeited funds into 2021 to strongly consider allowing non-taxable reimbursements up to the new limit for 2021 only.

Interested employers must adopt amendments to accommodate this provision no later than the end of the plan year being amended.

There seems to be strong bipartisan interest in extending this new higher allowance.  The $5,000 threshold was set 35 years ago when the Internal Revenue Code was rewritten in 1986, with no indexing provision.  Indexing it annually, starting from the new 2021 high threshold, seems to be a realistic proposition.  Time will tell if Congress can make that happen this year.

IMA will continue to monitor regulator guidance and offer meaningful, practical, timely information.

This material should not be considered as a substitute for legal, tax and/or actuarial advice. Contact the appropriate professional counsel for such matters. These materials are not exhaustive and are subject to possible changes in applicable laws, rules, and regulations and their interpretations.