ECFC Issue: Child Care
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Increase dependent care FSA contribution amounts and apply an inflation adjuster.

Dependent care FSAs are pre-tax dollars individuals set aside to offset work-related dependent care costs. The statutory $5,000 contribution limit was set more than 20 years ago and has never been adjusted for inflation. The amount falls far below dependent care costs in most parts of the nation. In fact, the average annual cost for center-based care for an infant was higher than a year’s in-state tuition and related fees at a four-year public college in 24 states and Washington, D.C.

Recommendations:

  1. Congress should enact legislation to increase the cap to $10,000 in, and adjust that amount on an annual basis for inflation by the Consumer Price Index. 
  2.  Increase the amount of compensation that can be disregarded when conducting the average benefits test for a dependent care FSA.

IRC Section 129 requires that average benefits provided to employees not highly compensated be at least 55% of the average benefits provided to highly compensated employees. For benefits provided through a salary reduction agreement, a plan may disregard any employees with compensation less than $25,000. This provision worked well originally because employees earning less than $25,000 typically elect the child care tax credit, rather than a salary reduction arrangement.

Recommendation:

When Congress increased the child care tax credit to $6,000, the $25,000 amount in Section 129 was not adjusted, causing many dependent care FSAs to fail the average benefit test. Congress should increase the amount in Section 129 to $30,000 to restore the original balance of the law. ECFC urges support of H.R. 1959, the Child and Dependent Care FSA Enhancement Act.