• Increase in the Exclusion for Employer-Provided Dependent Care Assistance

    An eligible employee’s gross income generally doesn’t include amounts paid or incurred by an employer for dependent care assistance provided to the employee under a qualified dependent care assistance program (DCAP). ( Code Sec. 129(a)(1) )

    A DCAP can be maintained under a cafeteria plan as a DCAP flexible spending arrangement. In order for such an arrangement to be a qualified benefit that is excludible from gross income elected through a cafeteria plan, the cafeteria plan must satisfy Code Sec. 125 and the DCAP FSA must satisfy Code Sec. 129 .

    Under pre-ARPA law, the amount that could be excluded from an employee’s gross income under a DCAP during a tax year was not more than $5,000, or $2,500 in the case of a separate return by a married individual, subject to certain limitations. ( Code Sec. 129(a)(2)(A) ) However, any contribution made by an employer to a DCAP cannot exceed the employee’s earned income or, if married, the lesser of employee’s or spouse’s earned income. ( Code Sec. 129(a) ; Code Sec. 129(b) ).

    New law. For 2021 only, the exclusion for employer-provided dependent care assistance is increased from $5,000 to $10,500, and from $2,500 to $5,250 in the case of a separate return filed by a married individual. ( Code Sec. 129(a)(2)(D) , as amended by ARPA Sec. 9632(a))

    A plan that adopts this change will not fail to satisfy the requirements of Code Sec. 125 and Code Sec. 129 if the plan is amended for this change retroactively as long as the amendment is adopted no later than the last day of the plan year in which the amendment is effective, and the plan is operated consistent with the terms of the amendment on the effective date of the amendment and ending on the date the amendment is adopted. (ARPA Sec. 9632(c))

    Effective date. This provision is effective for tax years beginning after December 31, 2020. (ARPA Sec. 9632(b))

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