The latest federal COVID-19 relief package includes another temporary change for the dependent care assistance program (DCAP), more than doubling the amount employees can contribute to DCAP flexible spending accounts.
The American Rescue Plan (ARP) of 2021 passed by Congress March 11 includes a one-year provision for 2021 that increases the DCAP maximum from $5,000 to $10,500 ($5,250 for married filing separate taxpayers). DCAP accounts allow employees to reimburse eligible expenses such as child care from an account they fund with payroll deductions, which reduces what they pay in taxes.
The earlier relief package passed by Congress in late December also changed flex account rules for 2021, allowing unspent 2020 contributions to a DCAP or health care flexible spending account to be used to pay for eligible 2021 expenses. In addition, the December bill suspended for 2021 the rules limiting when employees can adjust their contribution levels, giving employees more flexibility to manage unforeseen circumstances during the pandemic and recovery.
Employees who had unused DCAP funds from 2020 should be mindful of the amount they elect to contribute in 2021. The election amount, when combined with excess 2020 funds, should not exceed the $10,500 limit, which is based on the date the service is provided/incurred -- not the date the expense is reimbursed by the plan or paid by the employee. Any unused DCAP funds from 2021 that remain available for use in 2022 will be subject to the previous $5,000 per year limit and the March 15 grace-period deadline, barring future changes made by Congress.
ARP also made one-year changes to the federal child and dependent care tax credit, raising the value of the credit, the limit on eligible expenses and the income for qualifying. Those changes may affect employees' decisions about DCAP contributions. Consult a financial advisor for more information.
Employees can make changes to their DCAP account in Workday using the "Change in Dependent Care Provider" event type. Detailed instructions can be found here. Enter an effective date of April 1 or later to access the higher limit.
For questions regarding flex account changes, contact the university human resources benefits team at 294-4800 or firstname.lastname@example.org. For questions about plan rules and tax impacts, contact the payroll, benefits and tax office at email@example.com.