On March 12, President Biden signed into law the American Rescue Plan Act of 2021 (“ARPA”), a $1.9 trillion COVID-19 relief package.  This article discusses the section of the ARPA that increases both pretax contribution limits to dependent care assistance programs (“DCAPs”) and the value of the dependent care tax credit for 2021.

DCAPs fall under Internal Revenue Code Section 129 and are typically are funded with salary reduction contributions through a Code Section 125 cafeteria plan on a pre-tax basis.  The annual limit on contributions to DCAPs is usually $5,000 ($2,500 for married employees filing separately).  Under the ARPA, the limit for 2021 is increased to $10,500 ($5,250 for married employees filing separately).  These increases are subject to a phaseout for certain high-income individuals.

Significantly, the increased benefit limits are not mandatory.  The ARPA also allows the amendment to be adopted up to the last day of the plan year with retroactive effect.