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The IRS issued guidance on the taxability of dependent care assistance programs (DCAPs), also known as dependent care flexible spending accounts (FSAs) for 2021 and 2022. Carryovers of unused DCAP amounts typically are not permitted, although a 2 ½ month grace period is allowed. Recent coronavirus-related relief allows employers to amend their plans to permit unused DCAP carryover amounts or extend the permissible grace period to plan years ending in 2021 and 2022.
If these dependent care benefits would have been excluded from income (if used during taxable year 2020 or 2021) these benefits will remain excludible from gross income and are not considered employee wages. They will also generally not be taken into account for purposes of applying the exclusion limits of IRS Code Section 129.
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