Dependent Care FSA Increase and Full COBRA Subsidies Pass Congress

Executive Summary

  • Congress has passed the American Rescue Plan Act of 2021 (ARPA). President Biden will likely sign it into law by tomorrow.

  • ARPA provides for a one-year increase to the dependent care FSA limit. For calendar year 2021, the dependent care FSA limit increases to $10,500 ($5,250 for married individuals filing separately).

  • ARPA also includes full (100%) COBRA subsidies for April through September for employees and family members who lost coverage because of involuntary termination of employment or reduction of hours.

Key ARPA EB Changes in the Senate

As discussed in our post last week, the House recently passed ARPA with a provision to provide 85% COBRA subsidies from April through September.

The Senate passed its amended version of ARPA over the weekend with two major employee benefits-related enhancements to the House version:

  1. The Senate version increases the COBRA subsidies from 85% to being fully subsidized (100%).

  2. The Senate version increases the dependent care FSA limit to $10,500 (,250 for married individuals filings separately) for calendar year 2021.

This Senate version of the bill has also now passed the House, which sends the bill to President Biden’s desk for signature.

Dependent Care FSA Increase to $10,500 for 2021

Despite not being addressed at all in the original House version of the bill, the Senate version of ARPA (that has now passed both chambers) surprised the employee benefits world with an increase to the dependent care FSA limit for calendar year 2021.

The Standard $5,000 Dependent Care FSA Limit

Employees can contribute up to $5,000 to the dependent care FSA each calendar year.  The limit is reduced to ,500 for married individuals filing separately.

Congress did not index the $5,000 limit to inflation when it established the cap in 1986.  Internal Revenue Code §129 simply fixes the contribution limit at $5,000 per calendar year.  As a result, the dependent care FSA limit remained constant at $5,000 for 35 years.  Using the Bureau of Labor Statistics’ standard CPI inflation calculator, ,000 in 1986 is the equivalent to $11,933 in 2021.

The IRS has confirmed on multiple occasions that only an act of Congress can modify that $5,000 statutory limit, including in a 2016 letter responding to First Lady Michelle Obama’s inquiry as to whether the IRS could increase the limit using its regulatory authority.

ARPA represents is the first time since 1986 the Congress has acted to increase the dependent care FSA limit.

The Dependent Care FSA Increase to $10,500 for 2021

As with the standard rules, the limit is reduced to half of that amount, or $5,250, for married individuals filing separately.

ARPA automatically sunsets the increased dependent care FSA limit at the end of 2021.  Therefore, absent additional congressional action, the dependent care FSA limit will revert to $5,000 for the 2022 calendar year.

Importance of CAA FSA Election Change Relief

The CAA provides that for plan years ending in 2021, employers may amend their Section 125 cafeteria plan to permit participants to prospectively change their Section 125 elections—including for the dependent care FSA—without experiencing a permitted election change event.  This includes any mid-year election to enroll in, increase, decrease, or revoke the FSA election.

Employers that have adopted the relief will be able to permit employees to increase their dependent care FSA elections to reflect the increased limit regardless of whether the employee experiences a permitted election change event.

Alternatively, it is likely that the mid-year increase to the dependent care FSA contribution limit qualifies as a significant improvement of a benefit package option under the existing permitted election change event rules.  Under that event, employees could enroll or increase an existing election in the dependent care FSA within the cafeteria plan’s specified timeframe (generally 30 days) even under the standard election change rules set forth in Treas. Reg. §1.125-4.

Non-Calendar Plan Year Dependent Care FSAs

Another quirk of the new 2021 calendar year limit increase is the complexity of applying it to a dependent care FSA that does not have a calendar plan year.

Employers sponsoring a non-calendar plan year dependent care FSA are already familiar with the complications that can arise from having a contribution limit tied to the calendar year.  As with the standard §129 limit, the ARPA increase to 2021 appears to apply only to the 2021 calendar year.  In other words, regardless of the cafeteria plan year, the $10,500 limit is available only for calendar year 2021.

Fortunately, because of the CAA election change relief provisions and existing permitted election change events described above, employers should be able to permit employees to change their dependent care FSA election to coordinate with the different 2021 calendar year limit.

Non-Calendar Plan Year Example:

  • Stephanie’s employer has a July 1 – June 30 dependent care FSA plan year.

  • She elected to contribute $5,000 to the dependent care FSA for the current plan year running from July 1, 2020 through June 30, 2021.

  • Her employer has adopted the CAA relaxed election change relief for plan years ending in 2021.

  • The employer adopts the 2021 increased $10,500 dependent care FSA limit as of April 2021.

Non-Calendar Plan Year Result:

  • For the current plan year running July 1, 2020 – June 30, 2021, Stephanie contributes $1,250 ($208.33 per semi-monthly payroll) to the dependent care FSA in calendar year 2021 (January – March 2021) prior to the increased $10,500 limit being made available under the plan.

  • Stephanie takes advantage of the CAA FSA election change relief offered by the employer to increase her dependent care FSA election as of April 2021.

  • She increases his election from $208.33 to $513.89 per semi-monthly pay period for the remainder of the plan year (April 2021 – June 2021).

  • Stephanie then elects to contribute $513.89 per semi-monthly pay period at open enrollment for the dependent care FSA plan year beginning July 1, 2021, so she will reach $10,500 over the full calendar year 2021.

What Happens at the End of 2021?

  • Although not clear yet, the IRS may provide that the cafeteria plan can automatically reduce employees’ elections back to $208.33 per pay period as of January 2022 to reflect the lower $5,000 contribution limit that will apply in calendar year 2022.

  • Alternatively, the employer can likely permit employees to change their elections back to $208.33 per pay period as of January 2022 based on the significant curtailment of coverage permitted election change event.

  • As a second alternative, the employer could reduce employees’ dependent care election limit at open enrollment for the plan year beginning July 1, 2022 to ensure that 2022 calendar year contributions do not exceed $5,000.

Retroactive Cafeteria Plan Amendment Permitted

The Section 125 cafeteria plan rules generally require that employers adopt and amend the plan prospectively to be effective.

Nonetheless, nearly every new form of cafeteria plan change in law in recent years has included an exception to this general rule that has permitted employers to retroactively amend the plan to incorporate the change.

This ARPA dependent care FSA increase also provides employers with the ability to retroactively amend the cafeteria plan, provided the employer satisfies two requirements:

  • The employer adopts the amendment no later than the last day of the plan year in which the amendment is effective (i.e., no later than December 31, 2021); and

  • The plan is operated consistent with the terms of such amendment for the full retroactive period (i.e., the period beginning with the effective date of the amendment and ending on the date the amendment is adopted).

Employers offering the increased $10,500 dependent care FSA limit should work closely with their FSA TPA in coordinating the execution of this required amendment by the end of calendar year 2021.

Full (100%) COBRA Subsidies from April – September

Included among the many pandemic relief provisions in ARPA is a COBRA subsidy structure that is now designed to fully subsidize COBRA to employees and family members losing group health plan coverage due to an involuntary termination of employment or reduction in hours.  The 100% subsidy begins April 1, 2021 and runs through September 30, 2021.

Individuals Eligible for COBRA Subsidies

Employees and other qualified beneficiaries who experience a COBRA qualifying event caused by an involuntary termination of employment (i.e., not including a voluntary termination of employment) or reduction in hours are eligible for the subsidies provided they elect COBRA coverage for some or all of the period from April 1, 2021 through September 30, 2021.

Subsidy Amount

The 100% subsidy amount leaves no balance payable by the employee or other qualified beneficiary.  In other words, the applicable COBRA premium is $0.


  • The House bill version had only an 85% subsidy, with the remaining 15% owed by the qualified beneficiary. The Senate version that passed both chambers of Congress modified the structure to now provide for a full (100%) subsidy).

  • The subsidy is not available for health FSA COBRA coverage.

Subsidy Duration

The COBRA subsidy period extends from April 1, 2021 through September 30, 2021.

Employees and other qualified beneficiaries eligible for the subsidy will have their access to subsidies cut short prior to September 30 for months of coverage beginning on or after the earlier of:

  • The individual becoming eligible for other group health plan coverage (not including excepted benefits such as dental/vision/EAP, health FSA, HRA, QSEHRA, or Medicare); or

  • The end of the COBRA maximum coverage period.

Employee Loss of Subsidy Eligibility Notification Requirement

COBRA subsidy recipients must notify the plan when they lose eligibility for the subsidy because they have become eligible for other group health plan coverage.  ARPA directs the DOL to issues guidance specifying the time and manner of such notice.

An employee or other COBRA subsidy recipient’s failure to timely notify the plan of loss of eligibility for the subsidy is subject to a penalty of $250 for each failure.  The penalty can increase to 110% of the amount of the subsidy received after loss of eligibility if the failure results from fraud.  There is also an exception providing no penalty will apply for failure due to reasonable cause and not to willful neglect.

Employers May Permit Medical Plan Option Changes

The standard COBRA rules provide that qualified beneficiaries can only elect to continue the coverage in effect at the time of the qualifying event except in a few specific circumstances.

For more details, see: Changing Plan Options Under COBRA

Under the special ARPA rules, employers may permit employees and other qualified beneficiaries eligible for COBRA subsidies to change their medical plan option without losing their right to the COBRA subsidies.  To qualify, the new plan option premium cannot exceed the premium of the original plan option at the time of the COBRA qualifying event, the new plan option must be available to similarly situated active employees, and the qualified beneficiary must elect the plan option change within 90 days of receiving notice of the ability to make such change.

Note that this plan option change applies to medical only. It does not apply to excepted benefits such as dental, vision, EAP, or health FSA.

Extended Election Period

For employees and other qualified beneficiaries who do not have COBRA coverage in effect as of April 1, 2021 but would be eligible for subsidies if they had elected COBRA, ARPA provides a special opportunity to elect COBRA effective as of April 1, 2021.  This includes qualified beneficiaries who never elected COBRA or elected COBRA but discontinued coverage (for a reason other than reaching the end of the maximum coverage period) prior to April 1, 2021.

These individuals have 60 days from the date of receiving notice of this extended election period to make the COBRA election.  COBRA coverage under this special extended election provision will be effective as of April 1, 2021 and will not extend beyond the standard maximum coverage period as would have applied based on the original qualifying event.

For example, an employee who was involuntarily terminated and lost coverage as of July 1, 2020 but never elected COBRA could now choose to elect COBRA as of April 1, 2021 through December 31, 2021.

Review of Subsidy Denials

Employees or other qualified beneficiaries who are denied COBRA subsidies may appeal the determination to the DOL for a determination within 15 business days of receipt.

COBRA Subsidy Notices

COBRA notices must include provisions including the availability of subsidies and, if offered, the ability to change plan options.

Specific content requirements:

  • The forms to establish eligibility for subsidies;

  • The name, address, and phone number to contact the employer or other person who can provide assistance and further information;

  • A description of the extended election period;

  • A description of the individual’s obligation to notify the plan of loss of eligibility for the subsidies, and the potential penalties for failure to do so;

  • A prominently displayed description of the right to subsidies and the conditions to qualify; and

  • If permitted by the employer, a description of the option to enroll in a different plan option.

Existing qualified beneficiaries eligible for subsidies, including individuals eligible for the extended election period to enroll in subsidized COBRA, must receive an additional notice including this information by May 31, 2021.

ARPA tasks the DOL with creating model notices for these purposes within 30 days of enactment (by April 10, assuming President Biden signs the bill into law on March 11).

Expiration of COBRA Subsidy Notices

No more than 45 days and no less than 15 days in advance of the expiration of COBRA subsidies, subsidized qualified beneficiaries must receive a notice that the subsidies will expire soon and specifying the date of expiration.  The notice must also state that the individual may be eligible for coverage without subsidies through standard COBRA or another group health plan.

This expiration notice does not apply where the loss of subsidies is caused by the employee becoming eligible for other group health plan coverage or exhausting the maximum coverage period.

ARPA tasks the DOL with creating model notices for these purposes within 45 days of enactment (by April 25, assuming President Biden signs the bill into law on March 11).

Employer and Carrier Tax Credits

Employers of self-insured plans and insurance carriers of fully insured plans will be eligible for tax credits to cover the cost of these COBRA subsidies made available through ARPA.


ARPA’s dependent care FSA increase to $10,500 for calendar year 2021 and full COBRA subsidies for April – September 2021 will provide welcome relief for many employees affected by the ongoing pandemic.

The 2021 dependent care FSA increase comes after decades of employers and employees complaining about the lack of any contribution limit increase since the establishment of the $5,000 cap in 1986.  There will almost certainly be efforts to extend the increase to future years after both parties enjoy the significant additional tax savings this year.

On the COBRA subsidy front, for those of us who remember the 65% ARRA subsidies that extended 15 months from 2008-2010 during the Great Recession, it’s almost like déjà vu all over again.  However, the enhanced full 100% COBRA subsidy in ARPA includes a number of different approaches that will require significant attention from employers.

Employers should work closely with their FSA and COBRA TPA to ensure compliance with these new changes.

Brian Gilmore
The Author
Brian Gilmore

Lead Benefits Counsel, VP, Newfront

Brian Gilmore is the Lead Benefits Counsel at Newfront. He assists clients on a wide variety of employee benefits compliance issues. The primary areas of his practice include ERISA, ACA, COBRA, HIPAA, Section 125 Cafeteria Plans, and 401(k) plans. Brian also presents regularly at trade events and in webinars on current hot topics in employee benefits law.

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