How to make increased ($10,500) DCFSA contributions if employer won't adopt the change. Contribute to my plan and spouse's?

[Turquoise99]

The American Rescue Plan allows for increased Dependent Care FSA (DCFSA) contributions in 2021 ($10,500 total, up from $5,000).  If my employer hasn't adopted the change, can we contribute $5k to my employer's DCFSA and $5k to my spouse's DCFSA (for a total of $10k, which would still be under the limit)?  We are currently contributing to my DCFSA.  As an alternative--if my spouse's employer HAS adopted the change--can we terminate my contributions and make the remaining 2021 contributions to my spouse's plan?

[bkktran]

This is a very important question that a lot of people don't seem to be aware of, and can potentially save thousands in taxes if they have children in daycare. There is very little information regarding the DCFSA change for 2021 and is difficult to find answers for these questions. I'm in the same boat where my employer will not adopt the increased limit.

I'm fairly sure that the Household limit is $10,500 regardless of one or two spouse, so it wouldn't be an issue if you spouse can opt in to their work contribution for $5k. The problem is that this won't fall under qualified "Life Event" changes, and it would have to be approved by company HR, so it depends on how flexible your HR is on qualified changes.

An Audit is unlikely in this scenario and even if there was, you would just explain about your understanding of the new limit. Even the IRS website doesn't say anything about this, only that the household limit is increased to $10,500.

[Opus 17]

Under normal situations, if you file jointly, the DCFSA benefit for both spouses is combined on line 12 of form 2441.  So under the old limits, each spouse could contribute $2500 (for example).  If both spouses contributed $5000, then form 2441 would show $10,000 on line 15.  But since the maximum qualified expenses on line 21 is $5000, if the spouses did have more than that withheld in DCFSA benefits, the excess would be added back to their taxable income.

Since the Recovery Plan Act did not make substantial changes to the program except raise the limit, it would seem likely that if two spouses each had a $5000 DCFSA, they would both get the benefit, since the maximum excludable care cost on line 21 should be $10,500 for 2021.    However, until the IRS actually releases the forms, there's no way to be 100% sure.

There would be no harm in doubling the DCFSA account, because if it were not allowed, the money would simply become taxable (which it would have been anyway) and there is no extra penalty assessed. 

[bkktran]

Thank you for your answer, Opus.

The main issue is that some companies are not adopting to the new increase. My response from HR is because due to Code, Section 129, a provision for Nondiscrimination in favor of high income earners. Both mine and my wife's employer have denied the increase due to this. I guess we are both above the income limit (whatever it may be), but as far as I understand it, company decisions for DCFSA are company wide and not based on individual incomes.

Another issue is that most companies will not let employees opt in for DCFSA during the middle of the year unless there is a qualified life event. So this increase is pretty much useless for a lot of people since employers have the final say-so for contributions.

I guess we are out of luck, but an answer is now available for those who qualify and is able to do so through their employer.

[Opus 17]

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@bkktran wrote:

Thank you for your answer, Opus.

The main issue is that some companies are not adopting to the new increase. My response from HR is because due to Code, Section 129, a provision for Nondiscrimination in favor of high income earners. Both mine and my wife's employer have denied the increase due to this. I guess we are both above the income limit (whatever it may be), but as far as I understand it, company decisions for DCFSA are company wide and not based on individual incomes.

Another issue is that most companies will not let employees opt in for DCFSA during the middle of the year unless there is a qualified life event. So this increase is pretty much useless for a lot of people since employers have the final say-so for contributions.

I guess we are out of luck, but an answer is now available for those who qualify and is able to do so through their employer.

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In general, there is no requirement that a company allow the new limits or mid-year changes.   They are permitted to do so, but they don't have to.  It depends on the company and their agreement with the benefits provider (if they outsource administration of the benefit).

The IRS notice permitting changes is here.

https://www.irs.gov/newsroom/new-law-provides-additional-flexibility-for-health-fsas-and-dependent-c...