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Increased Limit for Dependent Care Assistance Programs: Traps for the Unwary
March 31, 2021
Increased Limit for Dependent Care Assistance Programs: Traps for the Unwary

The American Rescue Plan Act of 2021 (ARPA), signed into law by President Biden on March 11, 2021, increases the amount employees can exclude from their 2021 gross taxable income for employer-provided dependent care assistance program (DCAP) benefits under Internal Revenue Code (Code) Section 129. Such benefits are often provided in the form of pretax employee contributions to a dependent care flexible spending account (DCFSA) through a Code Section 125 cafeteria plan.

Ordinarily, the amount that can be excluded for DCAP benefits is limited to $5,000 (or $2,500 for married individuals filing separately), subject to certain earned income limitations. For 2021, ARPA has increased that limit to $10,500 (or $5,250 for married individuals filing separately).

This increase in the amount of DCAP benefits that can be provided on a tax-free basis in 2021 is welcome news for employees whose dependent care needs and expenses have been impacted by the COVID-19 pandemic and seems straightforward on its face. However, there are several considerations associated with this income exclusion that employers and employees should be aware of, as described in detail below.


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