American Rescue Plan Act of 2021: Dependent Care Assistance Plan Limit Increase and COBRA Premium Subsidy

Among the many provisions offering potential relief to workers, the American Rescue Plan Act (ARPA 2021) signed into law on March 11, 2021 provides temporary updates to Dependent Care Assistance Plan limits and COBRA premiums.

Dependent Care Assistance Plans (DCAPS)

In Section 9632,  ARPA 2021 provides a one-time increase to the IRS maximum contribution limit for Dependent Care Assistance Plans (DCAPs)–also known as dependent care flexible spending accounts– for the 2021 calendar year. The contribution limit for DCAPS was $5,000 for individuals who are single/head of household or individuals married filing a joint return with their spouse, or $2,500 for an individual married and filing separately from their spouse.

Under ARPA 2021, the DCAP contribution limit maximum increases to $10,500 for individuals who are single/head of household or individuals married filing a joint return with their spouse, or $5,250 for an individual married and filing separately from their spouse. This increased limit more than doubles the amount of tax-free money individuals can set aside to help pay for their dependent care expenses, which saves them money.

While this provision will help reduce a worker’s taxable income, it’s important to note that it’s optional for employers to offer, and the increase only applies to the 2021 calendar year. Employees should check with their employer to see if their plan allows them to contribute more in 2021. If an employer chooses to allow the increased DCAP limit, they should:

1. Notify their DCAP plan administrator and let them know that they would like to increase the 2021 limit, and
2. Amend their Cafeteria Plan documents to include the increase.

Employers can retroactively amend their plan to include the new limit as long as the amendment is made by the last day of the 2021 plan year.

COBRA Premium Subsidy

In addition to the Dependent Care plan limit increase, ARPA 2021 also provides a temporary COBRA premium subsidy. From April 1, 2021 through September 30, 2021, COBRA premiums will be 100% subsidized for individuals and their families who lost their insurance coverage due to reduction in hours or lost employment involuntarily. Individuals who voluntarily terminated their employment or are eligible for other group coverage will not be eligible for the premium subsidy. There are also new COBRA notice requirements. The DOL is responsible for creating the new COBRA model notices and these notices will discuss the subsidy, the extended enrollment period, and the different available coverage levels. To learn more about the COBRA subsidy provision and requirements, employers should contact their benefit broker and/or their COBRA administrator.

Click here to see ARPA 2021 in its entirety.

Hannie Spitzack is a CDHP Partner Success Manager with BPAS VEBA & Consumer Driven Health Plans.