As your benefits broker, I want to make sure you’re up to speed on one of the most significant changes to dependent care benefits in decades. If you haven’t heard the news yet, here it is: the
Dependent Care FSA limit just jumped from $5,000 to $7,500 per household as of
January 1, 2026.
This is the first increase in
25 years. Yes, you read that right: a quarter century.
For working parents juggling daycare costs, summer camps, and after-school programs, this is genuinely exciting news. But for you as an employer, there’s more to this story than just updating a number in your benefits package. Let me walk you through what you need to know and what you should be doing right now.
What Exactly Changed?
The IRS finally raised the dependent care FSA contribution limit to
$7,500 for most employees. For married couples filing separately, the limit is
$3,750.
But here’s where it gets a bit more complicated.
Highly compensated employees: those earning
$160,000 or more in 2025: face a more restrictive cap of just
$3,200 in 2026. This creates a two-tiered system that you’ll need to manage carefully.
The increase is designed to help families keep pace with the skyrocketing costs of childcare and dependent care. According to recent data, the average cost of daycare in many metropolitan areas now exceeds
$15,000 per year per child. The old $5,000 limit simply wasn’t cutting it anymore.
Why This Matters for Your Employees
Let’s talk dollars and cents for a moment.
When an employee contributes to a dependent care FSA, that money comes out of their paycheck
before taxes. For an employee in the
20% federal tax bracket, maxing out the new $7,500 limit instead of the old $5,000 limit means an additional
$500 in federal tax savings alone.
But the savings don’t stop there. Both you and your employee also save on
FICA taxes: roughly
$191.25 each on that extra $2,500 in contributions.
For your employees, this is real money that goes directly back into their pockets. And for you as an employer, offering this enhanced benefit can be a powerful recruitment and retention tool in today’s competitive job market.
The Compliance Challenge You Can’t Ignore
Now, here’s the part that keeps benefits administrators up at night: the
55% Average Benefits Test (ABT).
This IRS nondiscrimination requirement is designed to ensure that tax-advantaged benefits aren’t disproportionately enjoyed by highly compensated employees. And with the new $7,500 limit, passing this test just got a lot trickier.
Here’s the problem:
highly compensated employees are far more likely to max out their dependent care FSA contributions. They have the disposable income to set aside $7,500 for childcare expenses. Meanwhile, lower-paid employees may contribute less: or skip the benefit entirely: because they can’t afford to reduce their take-home pay.
This participation imbalance can cause your plan to
fail the ABT. And if that happens? Your highly compensated employees lose the tax-free status of their dependent care FSA benefits. That’s a headache nobody wants.
Is Adoption Automatic? Not Quite.
Here’s something important to understand:
adopting the new $7,500 limit is optional for employers.
You are not required to increase your dependent care FSA limit. You can choose to keep it at the old $5,000 threshold if that makes more sense for your workforce composition and compliance situation.
However, if you want to offer the higher limit: and take advantage of the recruitment and retention benefits that come with it: you’ll need to take some specific steps.
What You Need to Do Right Now
If you’re considering offering the increased limit (or if you’ve already rolled it out for 2026), here’s your action checklist:
1. Amend Your Plan Documents
Your Section 125 cafeteria plan documents need to be updated to reflect the new $7,500 limit. This isn’t optional: it’s a legal requirement if you want to offer the higher amount.
2. Update Your Payroll and Benefits Systems
Make sure your payroll provider and benefits administration platform are configured to accept the new contribution limits. A quick call to your vendors can confirm everything is set up correctly.
3. Conduct Nondiscrimination Testing Early
Don’t wait until year-end to find out you have a compliance problem. Run preliminary nondiscrimination testing during or immediately after open enrollment. This gives you time to make adjustments if needed.
4. Consider Alternative Plan Designs
If you’re worried about failing the ABT, you have options:
- Exclude highly compensated employees from participating in the dependent care FSA altogether
- Implement tiered limits: for example, $5,000 for HCEs and $7,500 for non-HCEs
- Offer employer contributions to non-highly compensated employees to boost their participation rates
These strategies can help balance participation across income levels and keep your plan in compliance.
5. Educate Your Employees
Many employees don’t fully understand how dependent care FSAs work or what expenses qualify. Take time to educate your workforce about eligible expenses: daycare, preschool, summer day camps, before and after school programs, and care for qualifying dependents.
Encouraging even modest contributions from lower-paid employees can help improve your ABT numbers while providing real financial benefits to your team.
Eligible Expenses: A Quick Refresher
As a reminder, dependent care FSA funds can be used for:
- Daycare and childcare centers
- Preschool tuition (but not kindergarten and above)
- Before and after school care programs
- Summer day camps (overnight camps don’t qualify)
- Care for a spouse or dependent who is physically or mentally incapable of self-care
- Au pairs and nannies (the portion of wages related to dependent care)
Employees cannot use these funds for overnight camps, tutoring, or food and clothing expenses: even if those costs are bundled with childcare.
The Bottom Line for Your Business
The $7,500 dependent care FSA limit is a meaningful enhancement to your benefits package. It shows employees that you understand the financial pressures facing working families, and it provides real tax savings that can make a difference in their lives.
But it’s not a “set it and forget it” situation. The compliance considerations are real, and failing to address them proactively can create problems for your highly compensated employees and administrative headaches for your HR team.
As always, I am here to help you navigate these changes. Whether you need assistance amending your plan documents, running nondiscrimination testing, or designing a strategy that works for your specific workforce, that’s exactly what we do at
Seiden Benefits.
Let’s Talk About Your Plan
If you haven’t already reviewed your dependent care FSA strategy for 2026, now is the time. The January 1st effective date has already passed, which means any testing or adjustments you need to make should happen as soon as possible.
Reach out to me directly, and let’s make sure your benefits package is working as hard for your employees: and your business: as it should be. I am working daily with clients on exactly these issues, and I’d love to help you get ahead of any potential compliance concerns.
Your employees are counting on you to offer benefits that matter. Let’s make sure you’re delivering: and staying compliant while you do it.
Contact us today to schedule a review of your dependent care FSA plan and ensure you’re ready for the new limits.
