Big Boost for Families: Dependent Care FSA Limit Increases to $7,500 Under New Tax Law

Great news for working families—starting in 2026, the annual contribution limit for Dependent Care Flexible Spending Accounts (FSAs) is increasing from $5,000 to $7,500. This change, introduced by the One Big Beautiful Bill Act, offers significant tax savings for eligible households.

What’s Changing Under the New Law?

Effective January 1, 2026, IRS Code Section 129 is updated to allow:

Families to contribute up to $7,500 annually to a Dependent Care FSA—up from the previous $5,000.
Married individuals filing separately to contribute up to $3,750, compared to the current $2,500.

These contributions are tax-free, reducing taxable income and increasing take-home pay for qualifying individuals who use FSAs to cover dependent care expenses.

Why This Matters for Families and Employers

Whether you’re budgeting for daycare, after-school programs, or elder care, this update offers a larger pool of pre-tax funds for your dependent care expenses. Our CPAs recommend taking advantage of this increased cap during open enrollment for the 2026 tax year.

Businesses, especially those offering employee benefit programs, should update their plan documents and communicate the new limits during enrollment periods.

Compliance Considerations: Nondiscrimination Testing Still Applies

While the limit increase is welcome, employers must remember that the nondiscrimination testing rules under Section 129 remain unchanged. These tests are designed to ensure fairness between highly compensated employees (HCEs) and the broader workforce:

Eligibility Test: Benefits must be offered fairly across all employee classifications.
Benefits and Contributions Test: Contributions must not disproportionately favor HCEs.
5% Owner Test: No more than 25% of benefits can go to individuals owning more than 5% of the company.
55% Average Benefits Test: The average benefit for non-HCEs must be at least 55% of that for HCEs.

Failing any of these tests could disqualify the tax-free treatment for HCEs—making compliance essential.

Key Takeaways for Taxpayers

Tax Savings: Households can now shield an additional $2,500 per year from taxes by contributing to a Dependent Care FSA.
No New Paperwork: There are no new IRS forms or filing requirements—just an updated cap.
Timing Matters: The new limits apply to tax years beginning after December 31, 2025. Prepare now for 2026 enrollment.

Froehling Anderson Can Help You Plan Ahead

As trusted CPAs in Minneapolis and St. Cloud, Froehling Anderson stays on top of tax law changes, so you don’t have to. Whether you’re a business owner adjusting your benefits plan or a family evaluating your dependent care options, we’re here to help you understand what this means for your business and your family.

Contact our trusted advisors today to see how this update fits into your overall tax strategy.

Sources

One Big Beautiful Bill Act – Alerus Resource Center
Checkpoint Executive Summary: The Act of 2025 (Thompson Reuters). Pg. 50.
https://accountinginsights.org/dependent-care-fsa-nondiscrimination-testing-requirements/

The information provided here is accurate at the time of publication but may change as laws and regulations evolve. While Froehling Anderson aims to share accurate, timely information, we encourage you to reach out to your relationship manager for guidance on your specific situation.