ARPA and Dependent Care Reimbursement Accounts
On March 11, 2021 President Biden signed the American Rescue Plan Act (ARPA). It contains many HR and benefit-related items, and in this post we’ll cover the temporary rules that apply only to 2021 for an increase in the limits for pre-tax Dependent Care Reimbursement Accounts (DCRAs), a category of Flexible Spending Accounts.
Since 1984, the limits on a DCRA have been $5,000 for employees who prepare their taxes as single, head of household, or married filing jointly, and $2,500 for those who prepare their taxes as married file separately. As if the cost of providing eligible child or adult care hasn’t increased in the past 37 years. [Note: it has, dramatically].
Recognizing this, Congress passed and the President signed a measure that will temporarily increase those limits for only 2021 to $10,500 ($5,250 for those married filing separately). However, regardless of plan year, the increased limits only apply on a calendar year basis to 2021, so a noncalendar year plan will need to ensure that an election that spans either 2020-2021 or 2021-2022 only allows the new temporary limit to have employees actually contribute and claim eligible expenses of no more than the applicable temporary limit ($10,500 or $5,250) during the 2021 calendar year.
If an employer chooses to implement the higher limits (and we don’t see much of a downside to doing so for DCRAs other than actually implementing the change), the earlier in the year they are implemented the less of a dramatic impact on take-home pay employees will see as they could increase their annual DCRA elections to more than double what they have been so far this year.
Employer Actions
If an employer chooses to implement these temporarily increased limits for 2021, they’ll need to do a few things:
- Ensure the payroll system or payroll vendor can accommodate a DCRA limit higher than $5,000.
- Using the temporary IRS/DOL rules also in effect for 2021, amend the plan document to include the mid-year election changes for FSAs (or at least the DCRA portion) so that employees could elect these higher limits. This plan amendment must be completed by December 31, 2021 even if these temporary higher limits are actually implemented earlier in the year.
- Communicate to eligible employees that they may make mid-year DCRA election changes, and provide forms for them to do so.
Let’s hope that Congress realizes the significant burden the 37 year old DCRA cap places on families and in turn they raise the permanent cap to the now-temporary limits. While we’re wishing, let’s also hope they then index that new limit to inflation so we don’t have to wait another 37 years for an increase. That would provide significant help to workers who need to provide eligible child or adult care for their dependents.