Dependent Care Spending Accounts Jump to $7,500 Limit

The dependent care FSA contribution limit jumped to $7,500 per household on January 1, 2026 - a 50% increase from the $5,000 limit that had been frozen since 1986. For Long Island employers with working parents on staff, this change could significantly impact employee retention and recruitment, but only if your plan documents are properly updated.

What Changed and Why It Matters Now

According to recent regulatory updates, the dependent care assistance program limit increase is already in effect. However, the benefit is useless to your employees unless your cafeteria plan documents are amended to reflect the new $7,500 maximum.

This affects any employee using dependent care FSAs to pay for child care, elder care, or other qualifying dependent care expenses with pre-tax dollars. For a working parent previously maxed out at $5,000, the additional $2,500 in pre-tax contributions could save them $625 to $1,000 annually in taxes, depending on their bracket.

The Bottom Line Impact on Your Business

The math is straightforward: employees in higher tax brackets save more money with increased FSA limits, making your benefits package more valuable without costing you additional premiums. For Nassau and Suffolk County employers competing for talent with higher-paying NYC firms, this enhancement could tip the scales for working parents evaluating job offers.

However, there's a compliance catch. Your employees cannot contribute above the old $5,000 limit until your plan documents are formally amended. This creates a potential employee relations problem - workers may assume they can contribute $7,500 immediately, then discover mid-year that your plan hasn't been updated yet.

Additional Tax Benefits for Employers

The same legislation also enhanced the employer-side tax credit for businesses that provide on-site child care or contract with child care providers. Companies offering comprehensive benefits packages can now claim credits on 40% of qualified child care expenses (50% for small businesses), capped at $500,000 annually.

While most 10-50 employee businesses won't hit these caps, the enhanced credit makes it more cost-effective to explore dependent care benefits as a recruitment tool, particularly in professional services where competing for working parents is critical.

Implementation Requirements

Three action items require immediate attention:

• Plan Document Amendment: Your cafeteria plan must be formally amended to incorporate the $7,500 limit before employees can access it
• Payroll System Updates: Contribution limits in your payroll system need adjustment to prevent over-contributions
• Employee Communication: Clear messaging about when the new limits take effect prevents confusion and complaints

The timing matters because employees make FSA elections during open enrollment based on the previous year's limits. Mid-year changes require careful handling to avoid discrimination testing issues.

Long Island Market Considerations

For Long Island medical practices, accounting firms, and professional services competing with Manhattan employers, dependent care benefits address a real pain point. The average cost of child care in Nassau County exceeds $15,000 annually, making tax-free savings increasingly valuable to working parents.

The challenge is execution. Employees who discover your plan hasn't been updated to allow the higher contribution may question whether your benefits administration is keeping pace with regulatory changes. Professional benefits administration ensures these updates happen automatically, without creating employee relations issues.

Getting the Update Done Right

Benton Oakfield handles cafeteria plan amendments as part of ongoing compliance management, ensuring your employees can access new benefits immediately when regulations change. Rather than waiting until the next plan year or discovering the oversight during tax season, we update plan documents proactively so your benefits investment delivers full value.

Compliance Note: Benefit plan rules and tax implications vary based on company size and location. This summary is for informational purposes only. Please contact your Benton Oakfield representative to review how these changes impact your specific plan documents.

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