Dependent Care Contribution Limit

[sjh518]

In 2021 the allowable contributions to a flexible spending daycare account were increased to $10,500 from the $5,000 in 2020.  It has reverted back to $5,000 in 2022 subject to further legislative changes.  With my employer we make elections for the "plan year" that runs from July to June.  So I bumped up my election to $10,500 beginning July 2021.  Therefore in 2021 I contributed 50% of $5,000 from Jan-June and 50% of $10,500 from July-Dec. for a total of $7,750.  Since 2021 is over, I cannot change what I contributed for that calendar year.  But in 2022, will I be able to contribute half the year at $10,500 and half at $5,000 (assuming no further legislation) for a total again of $7,750?  Or will my contributions stop in 2022 when I reach $5,000?  I have read that the $10,500 limit was for a "plan year" so just not sure how the IRS will monitor this and whether Turbo-tax will handle it correctly.

[DianeW777 · Accepted solution]

 Your employer should be taking into account the changes on your W-2.  However, as stated by @Opus 17  the increase applies only to 2021, as of now.  You will use what you received and be sure to answer the TurboTax questions correctly.  

2020: Rules under Taxpayer Certainty and Disaster Tax Relief Act of 2020

The IRS states it as follows for any amounts that were not used and carried from 2020, which does not apply to your situation.  

Temporary special rules for dependent care flexible spending arrangements (FSAs). IRS Instructions Form 2441

Section 214 of the Taxpayer Certainty and Disaster Tax Relief Act of 2020 provides temporary COVID-19 relief for dependent care FSAs. This legislation allows employers to amend their dependent care plan to allow unused amounts to be used in a subsequent year. It also allows employers to amend their dependent care plan to allow participants to use amounts in a subsequent year if a dependent turned 13 before the funds were used. Unused amounts from 2020 are added to the maximum amount of dependent care benefits that are allowed for 2021. See the instructions for line 13.

@sjh518  

[Edited: 01/19/2022 | 11:38p PST]

[Opus 17]

The temporary increase was for plan years starting in 2021.  For most people, that would be January 1, but for your employer, that is July 1, 2021.  So the increased limit applies to your entire plan year July 1, 2021 through June 30, 2022.  You have nothing to worry about.  (When your new plan starts July 1, 2022, you will revert to the original $5000 limit.)

As to whether Turbotax will handle this, it should, but I haven't tested it.  Post back if you think it is not being handled correctly.  You should be asked for the dates of the plan year if it is not Jan 1-Dec 31.

[Edited]

Your maximum election to an FSA beginning July 1, 2022 will be $5000.  The IRS notice that expanded the eligible contribution specified that it covered any plan year starting in 2021.  Most plans start Jan 1, but if your plan started July 1, 2021, then you can elect $10,500 for your 21-22 plan year, and you will go back to the $5000 maximum election for the 2022-23 plan year.

However, being able to elect a certain contribution is disconnected from being able to actually exclude the benefit from income tax, because the exclusion on your tax return is $10,500 for the 2021 calendar year, and reverts back to $5000 for the 2022 calendar year.  This can create a situation where you can choose a benefit that is larger than you can actually claim on your tax return.  If this happens, the excess is added back to your taxable income, but there is no additional penalty.  The formula and situations are complex and involve carryovers and grace periods.  If you have been using your benefit all along, you are probably in the situation of example 3 from IRS notice 2021-26 (see below).  You would only be able to exclude $5000 on your 2022 tax return, even though you might actually have $5000 of 21-22 benefit left over plus $2500 of 22-23 benefit.  

So the answer to "what can I elect for the plan starting July 1, 2022" is $5000.  The answer to "will it all be tax-free on my 2022 tax return?" is probably not, but it's complicated. 

[sjh518]

Thank you for your reply.  However, can you provide the applicable reference to IRS publications or other authoritative literature that supports your answer?  Everything I find seems to say the limit is calendar year or is silent in explaining "plan year."  I have asked some benefits managers and they are stumped, mostly because they have calendar year plans and did not have to address it.

Thank you.

[AmyC]

In American Rescue Plan Act of 2021 - Congress.gov, using the Public Law version, summary tab, we find:

PART 4--DEPENDENT CARE ASSISTANCE

(Sec. 9631) This section increases rate of the tax credit for child and dependent care expenses and makes the credit refundable. It also increases the dollar limit on such expenses that are eligible for the credit.

(Sec. 9632) This section increases the amount of the tax exclusion for employer-provided dependent care assistance to $10,500 in 2021.

The law is fluid and with your plan year issue, I am certain there will be challenges to the law. Stay tuned.

[Opus 17]

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@sjh518 wrote:

Thank you for your reply.  However, can you provide the applicable reference to IRS publications or other authoritative literature that supports your answer?  Everything I find seems to say the limit is calendar year or is silent in explaining "plan year."  I have asked some benefits managers and they are stumped, mostly because they have calendar year plans and did not have to address it.

Thank you.

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I was incorrect.  The situation is complex, and I may not entirely understand the IRS documents.  Try the official IRS notice here,

https://www.irs.gov/pub/irs-drop/n-21-26.pdf

and this article from a law firm explaining it,

https://www.dickinson-wright.com/news-alerts/moore-irs-clarifies-treatment-of-dependent

There are two concepts that seem like they should be the same but are actually completely different.  What can you elect to contribute to the plan, and how much benefit (reimbursement) can you actually exclude from income on your tax return.  You may be in a situation where you can contribute more than you can exclude, which means that part of your benefit gets added back to your taxable income.  (There is no additional penalty for this, and because your FSA is also excluded from social security tax and you don't have to pay that if the benefit is taxable, you still come out slightly ahead.  But it's complicated.)

The exclusion limit on your tax return is $10,500 for calendar year 2021 and $5000 for calendar year 2022, even though your employer can allow you to contribute up to $10,500 for a plan that spans those years.

The ultimate excludability seems to involve both 2021 and 2022 limits and how you used your benefits.  See examples 2 and 3 in the IRS notice. 

What matters on your tax return is not contributions, but reimbursements.  Your employer will certainly allow you to elect to contribute up to $5000 for your plan year that starts July 1, 2022, but whether you will actually be able to exclude that from income is questionable.  You may be limited to an exclusion on your 2022 tax return of $5000, meaning that any extra benefits you used would be added back to your taxable income (there is no penalty, however).  Under those circumstances, it seems likely that you will want to avoid taking reimbursements from your 2022 plan until after Jan 1, 2023, which makes it a carryover that will be excludable in 2023 rather than 2022.  But that will also depend on the 2023 carryover rules.

For your 2021 tax return, you got reimbursed whatever you got, and it's too late to change it.  Your tax return will be whatever it will be.  Any amount remaining in your account is not a carryover, because you are still in the middle of your plan year.  When it comes to your benefits election for the 22-23 plan year starting July 1, 2022, how much you can or should elect to contribute will depend on your remaining balance from the 21-22 plan year (if any) and the details of any grace period your plan offers.

I would focus on 2021 for now, and ask back when your benefits election is closer to the deadline so we can re-analyze the situation.