Following up on guidance issued in February the IRS has issued a new notice on the temporary carryover rules for dependent care flexible spending accounts. The 2021 Consolidated Appropriations Act (CAA) provides that, for plan years ending in 2020 and 2021, participants in a dependent care plan may carry over unused amounts into the next plan year. These carryover amounts do not count against the applicable annual limit on tax-favored dependent care assistance.

The new IRS notice addresses how the carryover rules apply in view of the increase in the annual limit from $5,000 to $10,500 for 2021 under the American Rescue Plan Act. The notice provides particular guidance for dependent care assistance plans that operate on a non-calendar plan year, including illustrative examples, in view of the fact that the limit on tax-favored dependent care assistance applies on a calendar year basis. The guidance assumes that the increase in the annual limit will, in fact, apply only to the 2021 calendar year and that, in 2022, the limit will return to $5,000.