Contribution limit for dependent care assistance programs temporarily rises for 2021

When Congress passed the American Rescue Plan Act of 2021 (ARPA) in March, the COVID-19 economic stimulus measure contained a number of updates affecting employee benefits. Read on to become familiar with a significant change for dependent care assistance programs (DCAPs).

Help for parents, caregivers

Only for 2021, the ARPA allows you to amend your DCAPs so employees can contribute up to $10,500 for the tax year (or $5,250 for individuals married and filing separately). Previously, the maximum amount an employee could contribute to a DCAP and exclude from gross income was $5,000 per tax year (or $2,500 for individuals married and filing separately).

The change is undoubtedly welcome relief to parents and caregivers who are likely to be returning to work in 2021 and unable to care for (1) kids who may have not yet returned to school or (2) other family members who continue to stay at home and need assistance. It allows employees to pay for more of those increased dependent care costs with pretax dollars.

How DCAPs work

Employers generally maintain DCAPs as part of their cafeteria plans, which allow employees to contribute pretax dollars to a variety of qualified benefits. The contributions, in turn, reduce the employee’s taxable income.