Implications of the Increased Dependent Care FSA

The One Big Beautiful Bill Act (OBBBA) increased dependent care flexible spending account (FSA) contribution limits is to $7,500 effective January 1, 2026 ($3,750 for married couple filing separately). This is the first update to the dependent care FSA limit in nearly 40 years. While the change is welcome, the increased contribution limit could lead to some unforeseen implications that employers should consider.

What Did Not Change for Dependent Care FSAs?

Dependent Care FSAs first began in 1986 with a contribution limit of $5,000. This $5,000 contribution limit remained unchanged until the OBBBA in 2025. The new $7,500 limit is not indexed to inflation, meaning the limit will remain $7,500 in future years unless Congress raises it.

The OBBA also did not change dependent care FSA non-discrimination testing requirements. Dependent care FSAs cannot discriminate in favor of highly compensated employees (HCE), which for 2026 will include employees earning $160,000 or more in 2025. Dependent care FSAs must continue to pass all applicable non-discrimination testing, including the 55% average benefits test that historically caused difficulty for some employers. This test requires that the average benefits provided by a dependent care FSA to non-HCEs be at least 55% of the average benefits provided to HCEs. This test can be difficult to pass if overall participation in the dependent care FSA is low or if HCEs are contributing much more to their dependent care FSAs than non-HCEs. Non-discrimination testing failures lead to the loss of tax advantages for HCEs; non-HCEs are not impacted.

Potential Impacts of Increased Dependent Care FSA Limit

There are a few things employers should keep in mind when deciding to implement the new $7,500 contribution limit. First, employers who want to increase the dependent care FSA limit should ensure that any dependent care FSA plan documentation is updated to reflect the new contribution limit.

Employers who have had issues passing non-discrimination testing in the past may continue to experience those issues with the potential for those issues to worsen as result of the increased limit. Presumably the employees in the best position to take advantage of the increased dependent care FSA limit are those who were already contributing the maximum amount i.e. $5,000. There’s a greater chance the employees already maxing out their dependent care FSA contributions are HCEs, and the

increased limit will now allow HCEs to contribute up to $7,500. With HCEs able to contribute more to their dependent care FSA, it is possible that it will be harder to satisfy any non-discrimination requirements, particularly the 55% average benefits test discussed above.

Unfortunately, you cannot know non-discrimination testing results until you have completed the testing as it will depend on who participates in the benefit and how much they contribute. Employers may want to discuss the non-discrimination testing requirements with the potentially impacted HCEs so those HCEs are aware that the tax treatment of their dependent care FSA contributions may need to be changed in response to any non-discrimination testing results. Remember that non-HCEs are not impacted by the testing.arent who meets the required definition. Employers would be well served to check with their insurance carrier to determine what their role is if coverage for a parent/stepparent is requested.  

_{The information provided is a summary of laws and regulations relating to employee benefit plan compliance. This information should not be construed as legal advice. In all cases, employers should consult with their own legal counsel.}