Dependent Care FSA FAQ for Employers
Is a Dependent Care FSA subject to ERISA?
Generally no — a DCAP that simply reimburses employees for dependent care expenses (or pays providers directly) is typically not treated as an ERISA welfare benefit plan, which means Form 5500 reporting generally doesn't apply. There are exceptions: a DCAP can become an ERISA plan if participants are required to use a specific provider (functioning like an employer-run day-care center), or if it effectively provides other ERISA-covered benefits like disability or in-home nursing care. Confirm your specific plan design with counsel.
Is a Dependent Care FSA subject to COBRA?
No. Unlike a Health FSA, a Dependent Care FSA is not subject to COBRA continuation coverage requirements. When an employee's employment ends, their participation simply ends — there's no COBRA election to offer for this benefit.
What's the 2026 contribution limit?
$7,500 per household ($3,750 for married filing separately), up from $5,000 in 2025, under the One Big Beautiful Bill Act (OBBBA). This is the maximum the IRS allows — your plan document can set a lower cap if you choose, though most employers adopt the full IRS limit.
Can we set our own, lower election limit?
Yes. The IRS limit is a ceiling, not a mandate — your plan document can specify a lower maximum election if you prefer, though there's rarely a compelling reason to cap it below the federal limit since the cost to you scales with actual utilization, not the cap itself.
What does it actually cost us to offer one?
Administration is typically billed per-employee-per-month by your TPA, plus any plan document/legal setup cost. Offsetting that, you save 7.65% employer-side FICA tax on every dollar employees contribute — for many employers, the FICA savings from active participants meaningfully offsets or exceeds the administration cost. Use the ROI calculator for a specific estimate.
Do we have to offer it to all employees?
Eligibility can be limited by reasonable, nondiscriminatory classifications (e.g., full-time employees, a minimum service period) but can't be structured in a way that primarily benefits highly compensated employees — that's exactly what nondiscrimination testing checks for.
What happens to unused funds at year-end?
Funds employees don't use are forfeited back to the plan under the use-it-or-lose-it rule, subject to any grace period or carryover provision your plan document allows (a DCAP is not eligible for the same carryover treatment as a Health FSA). Forfeited amounts can generally be used to offset plan administration costs or reallocated to participants per IRS rules — ask your TPA how they handle this.