American Rescue Plan Act Adds Dependent Care Relief

A multi-ethnic group of four children, 5 to 7 years old, playing together on a playground during school recess. They are sitting side by side on two slides, looking at the camera. They are all wearing masks, back to school during the COVID-19 pandemic. .

By: Claudia G. Allen

The American Rescue Plan Act (ARPA) enacted March 11 includes a substantial increase in the limits for dependent care under Flexible Spending Plans (Section 125 cafeteria plans) as well as increasing the tax credit for child care for calendar year 2021. Combined with the flexibility to make changes to plan elections mid-year, the increase will offer significant tax relief to those incurring high dependent care costs.

Prior to the ARPA, the limit for dependent care was $5,000 per household for single filers or married couples filing jointly ($2,500 for married filing separately).  The new limit for 2021 is $10,500 per household ($5,250 for married filing separately) which can apply to expenses for dependent children up to age 13 or elderly or disabled dependents living at your home at least 8 hours per day.  In addition, remaining 2020 funds may be spent in 2021 on a dependent that “ages out” by turning 13 during the COVID-19 emergency.  The age limit remains at 14 in 2021.

Reversing the FSA rule that once made, an election could not be changed unless there was a change in family status,  the Consolidated Appropriations Act (CSA) signed into law at the end of 2020 now allows mid-year changes to elections. Employers have until the end of the calendar year to formally adopt amendments, but can implement the change immediately so that payroll deductions can be increased.

The CSA also allows employers to extend the grace period for using health or dependent care benefits remaining at the end of 2020.  The current grace period would end March 31, but can be extended until December 31. It is important to note that carryover funds in a health FSA would preclude use of an Health Savings Account in that calendar year.

Claudia Allen practices in the area of Employee Benefits.