Employers that adopted the $7,500 limit must document it, and proposed IRS testing rules may ease a key compliance hurdle
Employers that let workers put up to $7,500 into a dependent care account this year may have skipped a step: updating the plan document. The year-end clock is already running.
Employers that raised their dependent care flexible spending account (FSA) limit to $7,500 for 2026 need to get the change into their Section 125 cafeteria plan documents before the year ends, Insurance Business reported on Oct. 30, 2026.
The One Big Beautiful Bill Act (OBBBA), signed July 4, 2025, lifted the annual limit from $5,000 to $7,500 ($3,750 for married individuals filing separately) for plan years beginning after Dec. 31, 2025. The old limit dated to 1986. Adopting the new one is optional, but employers that do must amend the written plan, law firm Polsinelli says.
Which deadline is the real one
Polsinelli told employers in December 2025 to sign amendments for a Jan. 1, 2026 start by Dec. 31, 2025. Insurance Business reported that employers who allowed the higher elections without updating the plan can still adopt the amendment retroactively through Dec. 31, 2026. Benefits counsel should confirm that date.
The reason it matters: a dependent care FSA exists only inside the written cafeteria plan, and a plan that operates outside its written terms risks a violation of the Employee Retirement Income Security Act (ERISA), Insurance Business said. Benefit plans are already drawing lawsuits, and HRD America reported that voluntary benefits lawsuits are turning employer Form 5500 data into evidence.
A testing change that could ease the pressure
Normally, an employer benefit has to pass nondiscrimination tests that show it doesn’t favor highly paid employees. The Internal Revenue Service (IRS) and the Treasury Department proposed regulations on Aug. 11 on how to run those tests for dependent care programs under Internal Revenue Code Section 129, the Federal Register notice for the proposal shows. The preamble says employers can rely on it before it’s final. HRD America covered the details in its report on the IRS proposal linking dependent care and Trump Account rules.
The 55 percent average benefits test requires non-highly compensated employees to receive, on average, at least 55 percent of what highly compensated employees receive. Groom Law Group said the higher limit had made employers nervous about passing it.
Under the proposal, only employees who actually receive dependent care benefits would count in the test’s denominator, the benefits consultancy OneDigital said, and CBIZ reported the same change. Groom Law Group called it the most useful part of the proposal. OneDigital also pointed to a new 90 percent eligibility safe harbor, and CBIZ put the 2026 highly compensated employee threshold at $160,000.
A plan that fails a test wouldn’t have to unwind the benefit. Law firm Mayer Brown said non-highly compensated employees would generally keep their tax treatment, while highly compensated employees could have the excess counted as income.
None of it applies until the rules are final. Mayer Brown said they would cover plan years beginning on or after the date final regulations are published, and the IRS scheduled a public hearing for Oct. 15.
Trump Accounts run through the same plan
The proposal also covers employer contributions to Trump Accounts under Section 128, and pretax payroll elections for those run through the Section 125 plan too. HRD America’s guide to what employers need to know about the Treasury guidance on Trump Accounts explains how those contributions work.
One more thing for year-end communications: OBBBA also enhanced the Child and Dependent Care Tax Credit, which Insurance Business reported may be worth more than the FSA to some lower- and middle-income employees.
