News

IRS Guidance Clarifies Taxability of Dependent Care FSAs Through 2022
May 25, 2021
IRS Guidance Clarifies Taxability of Dependent Care FSAs Through 2022

The IRS addressed confusion over the taxability of dependent care flexible spending account (DC-FSA) funds for 2021 and 2022, clarifying that it won't tax amounts that COVID-19 relief provisions allowed to be carried over from year to year, or that are used during an extended period for incurring claims.

DC-FSAs are also referred to as dependent care assistance programs (DCAPs) or dependent care reimbursement accounts (DCRAs). Regardless of what they're called, under these plans employees set aside a certain amount of pretax wages to pay for dependent care expenses.

Because of the pandemic, many people couldn't use the money they set aside in their DC-FSAs in 2020 and 2021.

IRS Notice 2021-26, issued May 10, clarifies that if DC-FSA funds would have been excluded from participants' income if used during taxable year 2020 (or 2021, if applicable), these benefits will be excluded from gross income and aren't considered taxable wages for 2021 and 2022.

Carrying over unused DC-FSA amounts from year to year is usually not permitted, although plans may include a two-and-a-half-month grace period to spend funds into the new year. COVID-19 relief legislation allowed employers to permit the carryover of unused DC-FSA amounts to plan years ending in 2021 and 2022.


Back to previous page