Dependent Care FSA - annual contribution limit for higher-paid participants

[mulleryi]

Dear friends at TurboTax community:

Both my wife and I are working on enrolling in benefits for 2025, and we have a question about contribution limit for Dependent Care FSA:

According to my wife's employer, she is a higher-paid participant, and therefore her employer is limiting her contribution to Dependent Care FSA to $1,500 in 2025. The benefit brochure says that:

The IRS requires an annual nondiscrimination test to make sure higher-paid participants do not disproportionately benefit from the FSAs. If the plan fails that test, we must take corrective action. For this reason, annual child/adult care FSA contributions for employees earning $150,000 or more a year will be limited to $1,500.

However, I found from the Internet that the annual contribution limit is $5,000 per household, and I couldn't find any IRS webpage suggesting a different limit for higher-paid participants. My employer is not limiting my contribution to Dependent Care FSA. As such, would it be OK for my wife to contribute $1,500, and for me to contribute $3,500?

Thanks a lot, and please do not hesitate to let me know if I could provide any additional information.

[Mike9241 · Accepted solution]

Nondiscrimination testing rules were created by the IRS and are generally designed to prevent plans (employers) from discriminating in favor of individuals who are either highly compensated or otherwise key to the business. Testing shows whether or not an employer's tax-advantaged plan is discriminating in favor of highly compensated employees or key employees.

so yes you can contribute $3,500 but your employer is also subject to nondiscrimination testing. if it passes then you have no tax issue.  If it does not pass, then the excess benefits provided to highly compensated individuals and key employees may not be excluded from income. In this case, excess deferrals would be reimbursed, so the employee's taxable compensation is increased.

For HFSA testing purposes, a highly compensated individual is (a) one of the five highest-paid officers; (b) a more than 10% shareholder of the company; or (c) among the highest paid 25% of all employees (other than non-participant excludable employees).

[mulleryi]

Thanks a lot!