Guidance and clarification for taxpayers enrolled in a dependent care assistance program is given in IR-2021-105 and Notice 2021-26, issued on May 10, 2021 by the IRS.
This is great news for the many taxpayer participants that had pre-pandemic pre-tax wages set aside. Benefits will remain excludible from gross income and will not be considered wages of the employee for tax years, 2020 or 2021.
Employers have been given permission to reimburse employees beyond the normal 2 ½ month grace period and to increase employer-provided dependent care benefits from $5000 to $10,500 for the 2021 taxable year under the American Rescue Plan Act.
Notice 2021-15, issued in February 2021, states that if an employer adopted a carryover or extended period for incurring claims, the annual limits for dependent care assistance program amounts apply to amounts contributed, not to amounts reimbursed or available for reimbursement in a particular plan or calendar year. Therefore, participants in dependent care assistance programs may continue to contribute the maximum amount to their plans for 2021 and 2022.
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