NONDISCRIMINATION TESTING AND NEW DEPENDENT CARE FSA CONTRIBUTION LIMIT
Beginning in January 2026, the maximum contribution to a Dependent Care Flexible Spending Account (DCFSA) will increase from $5,000 to $7,500 ($3,750 for married employees filing separately). This expanded limit offers employees greater tax savings for child and adult care expenses, but it also raises the stakes for employers when it comes to nondiscrimination testing (NDT).
Why This Matters
NDT rules haven’t changed, and with higher contribution limits, plans may be more likely to fail the 55% Average Benefits Test, which requires that non-highly compensated employees (NHCEs) receive at least 55% of the benefits received by highly compensated employees (HCEs). Other tests, such as the More-Than-5% Owner Concentration Test and Eligibility/Benefits Tests, also continue to apply.
Employer Considerations
To reduce compliance risk and maintain plan balance, consider these proactive strategies.
- Encourage NHCE participation through targeted communication on the value of the DCFSA.
- Offer modest incentives for NHCEs, such as a small employer match.
- Set lower election caps for HCEs while allowing NHCEs to take advantage of the full IRS maximum.
- Run interim testing to catch potential issues before year-end.
- Customize maximums by employee group to promote equitable utilization.
While the higher contribution limit is a win for employees, it also makes careful planning and monitoring essential for employers. Reviewing plan design, updating documents where needed, and engaging in early testing can help ensure your DCFSA remains compliant while maximizing the benefit for your workforce.
Question of the Month
Q: The birth of a child is a qualifying life event, allowing an employee to change plans mid-year. Can an employee still change plans if they don’t add the child to the medical plan?
A: The birth of a child is not only a qualifying life event, but it is a HIPAA special enrollment event. This means the employee has the right to change benefit options regardless of whether the employee adds the new child to the medical plan.
Answers to the Question of the Week are provided by Kutak Rock LLP. Kutak Rock provides general compliance guidance through the UBA Compliance Help Desk, which does not constitute legal advice or create an attorney-client relationship. Please consult your legal advisor for specific legal advice.
| This information is general in nature and provided for educational purposes only. It is not intended to provide legal advice. You should not act on this information without consulting legal counsel or other knowledgeable advisors. |
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