Question re. FSA Dependent Care Limit Raised in 2021

[justin-and-vinh]

Hello Members of the Community!

FSA Dependent Care current contribution limits are $2,500 for a Single or $5,000 for a Married Couple Filing Jointly ($2,500 for each spouse).

The new Tax Bill (3rd stimulus) enacted into law provides that the contribution limit will be raised to $10,500 for a Married Couple Filing Jointly, BUT it leaves to each employer to whether or not implement it via their Benefits program (PayFlex etc...). So an Employer might technically not implement if too complex.

Question:
- Assume a couple whose spouses both work
- Assume both spouses Employers offer an FSA Dependent Care via their respective Benefits programs
- Assume neither Employer decides to implement the new contribution limit.

In that case, and despite the respective Employers have declined to implement the raise of the contribution limit, can both spouses still contribute $5,000 EACH (normally if one spouse contributes $5,000, the other spouse cannot, due to having reached the limit for the couple), FOR A TOTAL OF $10,000?

Whether or not the Employers have decided to implement the new provision, the couple should technically be safe from a legal/tax standpoint, because the law allows for a contribution limit raised to $10,500.

Am I right in my reasoning?

[DMarkM1]

It appears the employers set the maximum for their employees.  The employers just cannot set a maximum above the IRS maximums.  So if your employers do not allow the higher contributions then you will not be able to make those higher contributions.  

[timdanger]

Bumping this because I have the same question, and I imagine a lot of people are going to be in this scenario.

Looking at form 2441 from 2020 and thinking about how it will look in 2021, is the IRS just going to change "$5000" on line 21 to "$10,500"?  If so, it seems like you could do what you suggest and get to exclude the full $10,000 from income, but it's not clear to me.

And the follow-up question is, let's say you do what you suggest here and each elect $5000--what's the downside if you guess wrong?  You just wouldn't be able to exclude that extra $5000 from income and are taxed on it (line 26 from 2441)?

Interested in other thoughts, as this has big impacts for families trying to muddle through open enrollment...

[justin-and-vinh]

Hi timdanger:

I came to the very same conclusion as you in that, worst case, we would pay taxes on those undue extra $5,000 that we deducted. Therefore, both my husband and I are setting aside $5,000 each on a pre-tax basis for 2021.

Cheers,

[justin-and-vinh]

Thanks DMarkM1 for your reply.

Unless I misunderstood what you wrote, it seems you didn't get my point: at no time is it question that we contribute more than what the IRS allows. The new law allows for a cap of $10,500 for s married couple filing jointly, and we intend to contribute $10,000 jointly, below the cap set forth by the law.

We are just circumventing the fact that an Employer may elect not implement, via their payroll/FSA accounts systems the ability to contribute more this year (even though it is allowed by law) – for practical reasons as simple as IT systems or reasons making it too complicated to implement that in the middle of the year.

If I was the only one working, and because my Employer elected not to implement the new cap, I would be stuck with contributing only $5,000 pretax to the FSA Dependent Care account (my company will assume I contribute for both of us).

It just happens that my husband also works, and even if his company also elects not to implement that new cap, he can still contribute up to $5,000 as well (his company will assume that he contributes $5,000 for both of us).

Together, at the end of the year when we do our taxes for 2021, we will have contributed a total of $10,000 together, which is below the $10,500 set by the law, despite both our Employers electing not to implement the new cap for convenience reasons.

The IRS does not, and certainly will not check with each Employer whether they have implemented in their systems the new cap allowing their employees to contribute more. The IRS will just enshrine in the 2021 tax rules the new limit of $10,500, and so will Turbotax for the calculations. The fact that for couples with both spouses working can resort to that trick will not result in anything illegal.