The $7,500 Dependent Care FSA Limit: A Win for Families—If Employers Can Pass the Test

Sep 9, 2025 | All, Benefits Administration, Compliance, FSA

Starting January 1, 2026, the annual dependent care flexible spending account (FSA) contribution limit will increase from $5,000 to $7,500. This long-awaited update is great news for working families, but it comes with a compliance challenge that employers can’t ignore.

The Opportunity: More Tax-Free Dollars for Families

Employees will soon be able to set aside up to $7,500 in pre-tax dollars for eligible dependent care expenses. For married couples filing separately, the limit is $3,750 per spouse. This increase can serve as a powerful recruitment and retention tool—especially for employees with young children or elder care responsibilities.

The Challenge: Nondiscrimination Testing

Under Section 129, the 55% Average Benefits Test (ABT) requires that the average dependent care FSA benefit received by non-highly compensated employees (NHCEs) equal at least 55% of the average benefit received by highly compensated employees (HCEs).

With the increased limit, HCEs are more likely to contribute the full amount, while NHCEs may opt out or contribute less—especially if they find the Child and Dependent Care Tax Credit (CDCTC) more advantageous. This imbalance increases the risk of failing the ABT, which would result in HCEs losing the tax-free status of their dependent care FSA benefits.

What Employers Should Do Now

With the dependent care FSA limit increasing to $7,500 in 2026, employers should take a proactive, strategic approach to ensure compliance and maximize the benefit’s value. If your organization has historically struggled with the 55% Average Benefits Test (ABT), now is the time to act.

Start by reviewing your prior year test results and employee participation trends. If HCEs are likely to max out their elections while NHCEs contribute little or opt out entirely, your organization may be at risk of failing the ABT—resulting in the loss of tax-free treatment for HCEs.

To mitigate this risk, consider the following:

Adjust Your Plan Design:

  • Exclude HCEs from dependent care FSA participation to ensure compliance.
  • Implement tiered limits, offering a lower maximum (e.g., $5,000) for HCEs while allowing NHCEs to elect up to $7,500.
  • Offer employer contributions to NHCEs to encourage participation—though this should be weighed against actual dependent care needs.

Conduct Preliminary Testing:

  • Conduct preliminary nondiscrimination testing during or shortly after open enrollment to identify potential issues early.
  • Use this data to adjust plan design or limit HCE elections before the plan year begins.

Educate Employees:

  • Promote your dependent care FSA during open enrollment with clear examples of reimbursable expenses.
  • Encourage even small elections from NHCEs to help balance participation and support compliance.

Communicate with HCEs:

  • Be transparent with HCEs about how their elections could impact the tax treatment of their benefits and those of their peers.

Final Thoughts: Strategy Over Simplicity

The increased dependent care FSA limit is a welcomed change—but it’s not a “set it and forget it” benefit. Employers must take a strategic approach to plan design, employee education, and testing readiness to ensure compliance and maximize value.

Have questions on how this change impacts your plan? We’re here to help! Contact your Client Account Representative, whose information can be found in your online account.

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