The American Rescue Plan Act (“ARPA”) temporarily amends Code section 129(a) to increase the amount of dependent care expenses that may be excluded from gross income.
Dependent care FSAs have historically been capped at reimbursing $5,000 per calendar year. However, under the ARPA, and only for taxable years beginning after December 31, 2020 and before January 1, 2022, dependent care FSAs can reimburse over double! The max is now $10,500 (or $5,250 for married individuals filing single returns).
Employers, of course, must amend their plans. Although generally Code section 125 cafeteria plans cannot be amended retroactively, the ARPA states that retroactive amendments are allowed for this purpose as long as: (1) the amendment is adopted no later than the last day of the plan year in which it is effective, and (2) the plan is operating consistent with the term of the amendment as of its effective date.
This will be welcome news for all employers who were struggling with allowing carryovers or grace periods for dependent care FSAs that would exceed the $5,000 max.
As you are well aware, the law and guidance are rapidly evolving in this area. Please check with your Fraser Trebilcock attorney for the most recent updates.
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Elizabeth H. Latchana specializes in employee health and welfare benefits. Recognized for her outstanding legal work, in both 2019 and 2015, Beth was selected as “Lawyer of the Year” in Lansing for Employee Benefits (ERISA) Law by Best Lawyers, and in 2017 as one of the Top 30 “Women in the Law” by Michigan Lawyers Weekly. Contact her for more information on this reminder or other matters at 517.377.0826 or elatchana@fraserlawfirm.com.
Brian T. Gallagher is an attorney at Fraser Trebilcock specializing in ERISA, Employee Benefits, and Deferred and Executive Compensation. He can be reached at (517) 377-0886 or bgallagher@fraserlawfirm.com.