Effective for taxable years beginning after 2025, the One Big Beautiful Bill Act (OBBB Act) increases the maximum annual contribution limit for dependent care flexible spending accounts (FSAs) to $7,500 (or $3,750 for married individuals filing separate tax returns).

As background, employers can provide dependent care benefits for their employees on a tax-free basis, subject to a maximum annual limit. These programs are also known as dependent care assistance programs (or DCAPs). Most dependent care FSAs are structured so that employees make contributions on a pre-tax basis through a Section 125 cafeteria plan. When employees incur eligible dependent care expenses, such as expenses for babysitting, child care, or day camp, they can seek reimbursement from their dependent care FSA.

Currently, the annual contribution limit for dependent care FSAs is $5,000 for single individuals and married couples filing jointly and $2,500 for married individuals filing separately. This limit, which is not indexed for inflation, has been in place since 1986 (except for a temporary increase during the COVID-19 pandemic). Effective Jan. 1, 2026, the OBBB Act increases this limit to $7,500 (or $3,750 for married individuals filing separately).

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Action steps

Employers that increase the contribution limit for their dependent care FSAs for 2026 should consider the following steps:

• Assess how the increased limit may impact the plan’s annual nondiscrimination testing results, particularly the 55%average benefits test.
• Review the written plan document to determine if updates are necessary due to the increased limit.
• Communicate the new limit to employees as part of the open enrollment process.

This Compliance Bulletin is not intended to be exhaustive, nor should any discussion or opinions be construed as legal advice. Readers should contact legal counsel for legal advice. ©2025 Zywave, Inc. All rights reserved.