IRS Clarifies Taxation for Dependent Care Programs for 2021 and 2022

Laner Muchin, Ltd.
Contact

Laner Muchin, Ltd.

The IRS recently issued Notice 2021-26, which provides guidance related to certain pandemic relief provisions including carry-overs and extended grace periods which impact dependent care assistance programs (DCAPs) provided under a Code Section 125 cafeteria plan in tax years ending in 2021 and 2022. Due to the pandemic, individuals with DCAPs found themselves incapable of using the pre-tax funds they had set aside in those accounts because, for example, daycare centers were closed or parents were home. In response, Congress passed a law allowing DCAPs to carry over unused benefits from a plan year ending in 2020 to a plan year ending in 2021 and from a plan year ending in 2021 to a plan year ending in 2022. Alternatively, a DCAP could extend its 2020 and/or 2021 grace period(s) for up to 12 months following the end of 2020 and/or 2021.

In Notice 2021-26, the IRS clarified that for 2021 and 2022, any amounts in a DCAP resulting from such carryover or extended grace period will remain excludable from gross income of the employee for 2020 or 2021 and will be disregarded for purposes of applying DCAP limits for subsequent tax years. However, note that for non-calendar year DCAPs, the IRS makes clear that for plan years ending in 2022, the increased exclusion will not apply to any reimbursement of expenses incurred during the 2022 portion of the plan year.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

© Laner Muchin, Ltd. | Attorney Advertising

Written by:

Laner Muchin, Ltd.
Contact
more
less

Laner Muchin, Ltd. on:

Reporters on Deadline

"My best business intelligence, in one easy email…"

Your first step to building a free, personalized, morning email brief covering pertinent authors and topics on JD Supra:
*By using the service, you signify your acceptance of JD Supra's Privacy Policy.
Custom Email Digest
- hide
- hide

This website uses cookies to improve user experience, track anonymous site usage, store authorization tokens and permit sharing on social media networks. By continuing to browse this website you accept the use of cookies. Click here to read more about how we use cookies.