Historic FSA update: employers must act before year-end if they want to raise dependent care contribution limits

ARTICLE | December 19, 2025

Authored by FMF&E

For the first time since 1986, the annual contribution limits for Dependent Care Flexible Spending Accounts (DCFSAs) are increasing. Under the One Big Beautiful Bill Act (OBBBA), employers can raise the cap on employee contributions beginning January 1, 2026. But the increase is not automatic.

To offer these enhanced benefits, plan documents should be formally amended by December 31, 2025. 

What’s changing?

The new limits raise the annual contribution ceiling to:

• $7,500 for individuals and married couples filing jointly (up from $5,000)
• $3,750 for married individuals filing separately (up from $2,500)

A brief refresher on DCFSAs

Dependent Care FSAs allow employees to set aside pre-tax income to cover eligible expenses for children under age 13, elderly parents, or disabled adult dependents. Qualified uses include:

• Daycare and preschool programs
• Before- and after-school care
• Summer day camps
• In-home caregiving for elderly or disabled dependents

DCFSAs are governed under Section 129 of the Internal Revenue Code, offering a triple tax benefit:

1. Contributions reduce federal taxable income
2. Exempt from Social Security and Medicare (FICA) taxes
3. Reimbursements for qualified expenses are tax-free

The employer also benefits: employee contributions reduce the organization’s payroll tax obligations. The increased benefit is funded through employee pre-tax deferrals, not employer outlays. Yet employers can save 7.65% in payroll taxes on each dollar deferred.

This benefit is optional - if you don’t act, it doesn’t happen

The law authorizes the increase but doesn’t require it. Employers should amend their cafeteria plan documents to reflect the new limits by December 31, 2025.

Inaction now likely means no increase until at least 2027 for calendar-year plans, as plan amendments must generally be adopted before the start of the plan year they affect.

Immediate action required: how to implement the change

Employers have a narrow window to act if they want the increased DCFSA limits to take effect for the 2026 plan year. This isn’t a change that will happen automatically, and it's strongly recommended that plan documents be formally amended before December 31, 2025. 

The first step is to take a close look at current participation rates: how many employees are contributing to your DCFSA, and how many are already maxing out under the current limits? It’s also worth considering what portion of your workforce is eligible for this benefit. If you'd like to run the numbers and model potential tax savings, we’re happy to assist. 

From there, you’ll need to adopt the amendment, coordinate with your third-party administrator to update systems and enrollment materials, and ensure your employee communications clearly reflect the new contribution limits. Educating your workforce on the enhanced benefit is critical, especially for working parents and caregivers who may now be able to set aside substantially more pre-tax dollars. 

The clock is ticking, and the opportunity is real. If you’d like help modeling the potential payroll tax impact of raising your plan caps, contact our office.

This article is intended to provide a brief overview of the recent changes to DCFSA regulations. Individual circumstances vary, and nondiscrimination testing, employee demographics, and plan design considerations may affect whether this change is advantageous for your company. We recommend consulting with your professional advisors to evaluate all options and determine the best approach for your specific situation.