On May 10, 2021, the IRS released Notice 2021-26,
which clarifies taxability of dependent care assistance programs
("DCAPs") for 2021 and 2022, including the carry-over of
unused balances from one plan year to the next and extended grace
periods for incurring expenses.
Section 129 of the Code provides an exclusion from gross income
for amounts paid for dependent care assistance benefits under a
DCAP, and employees often contribute to the DCAP through payroll
deduction under a cafeteria plan. For 2020, the exclusion could not
exceed $5,000. Unused DCAP funds have not been available to be
carried over to a subsequent plan year, but were allowed a 2
½ month grace period after the applicable plan year. If the
sum of DCAP benefits used in the taxable year exceeds the
applicable limit for the year, the excess is taxable. While DCAP
amounts may be carried over during the 2 ½ month grace
period, the grace period does not increase the applicable limit for
the year in which
