IRS Provides Clarification for DCAPs in 2021 and 2022

The Internal Revenue Service (IRS) released Notice 2021-26 clarifying what amounts may be reimbursed under a dependent care assistance program (DCAP) on a tax-favored basis in 2021 and 2022. The additional flexibility in recent legislation to allow carryovers and extended grace periods, as well as the increased contribution limit of $10,500 for the 2021 calendar year, left some confusion as to exactly how much could be reimbursed on a tax-favored basis during affected DCAP plan years. The notice, which includes several examples, confirms that amounts available in 2021 and 2022 due to a carryover or extended grace period will not count toward the $10,500 limit in 2021 or the expected $5,000 limit in 2022.

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