Two things need to happen before the end of 2026 for employers offering dependent care flexible spending accounts, and the first one has a hard deadline.
The One Big Beautiful Bill Act (OBBBA), signed into law July 4, 2025, permanently raised the maximum annual contribution limit for dependent care FSAs from $5,000 to $7,500 and $3,750 for married individuals filing separately, effective for plan years beginning on or after January 1. The increase was the first since 1986. Adoption was optional, but employers that chose to offer the higher limit needed to amend their Section 125 cafeteria plan documents to reflect it. That amendment must be in place by December 31, 2026, a retroactive adoption for employers who have been informally allowing the higher elections through the plan year without yet updating the written plan.”
A dependent care FSA only exists inside an employer’s written cafeteria plan under Internal Revenue Code Section 125. If the plan document still carries the $5,000 ceiling and the employer allowed elections up to $7,500 this year, there is a mismatch between what the plan permits on paper and what employees have actually been doing. A plan operating outside its written terms carries ERISA compliance risk, and the window to correct it closes December 31.
The second development is not a deadline but it changes the benefit’s risk profile going forward. On August 11, 2026, the IRS and Treasury released proposed regulations (REG-101355-26) providing the first comprehensive framework for applying nondiscrimination testing to dependent care assistance programs under IRC Section 129. Until this guidance, employers had operated under the Section 129 nondiscrimination rules for decades without formal IRS direction on the mechanics of the four required tests.
The proposed rules clarify all four nondiscrimination tests under Section 129, covering eligibility, contributions and benefits, 55 percent average benefits, and owner concentration. The most practically significant clarification concerns the 55 percent average benefits test, which requires that non-highly compensated employees receive at least 55 percent of the average benefits that highly compensated employees receive. Under the methodology that had prevailed in practice, all eligible non-HCEs were counted in the denominator, including those who did not participate in the plan. That approach consistently produced a low average benefit for non-HCEs and made the test difficult to pass.
The proposed rules specify that only employees who actually receive dependent care benefits greater than zero are counted. That change removes the drag from non-participants and makes the 55 percent threshold substantially easier to reach for most plans. Employers can rely on the proposed rules before they are finalized, per IRS guidance.
For plans that have historically capped HCE elections precisely to manage the 55 percent test, the proposed methodology opens room to reassess. Employers who failed the test under the old approach may want to rerun testing under the new methodology before year-end. The proposed rules also include a correction mechanism that allows certain failures to be addressed by including excess benefits in affected HCEs’ income by the Form W-2 deadline.
The interaction between the higher limit and the clarified testing rules is what makes the August guidance relevant to employers who adopted the increase. Employers who raised their dependent care FSA limit to $7,500 in 2026 took on more HCE exposure in the 55 percent test. Higher HCE elections increase the average benefit the non-HCEs must match. The IRS guidance arrived in August to address exactly that dynamic, and its favorable methodology partially offsets the additional compliance pressure the limit increase created.
The health FSA limit for 2026, set separately under IRS Rev. Proc. 2025-32, is $3,400, a $100 increase from 2025, with a maximum carryover of $680 into the 2027 plan year. No regulatory changes affected health FSA testing this year. A separate OBBBA provision also enhanced the Child and Dependent Care Tax Credit, which may make the credit more advantageous than the FSA for some lower- and middle-income employees. That comparison belongs in employee-level election guidance rather than plan administration, but it is a natural extension of the same year-end conversation.
