For the first time in nearly four decades, the Dependent Care Flexible Spending Account (DCFSA) annual contribution limit is increasing — a significant development for working parents and caregivers balancing child and dependent care expenses.

Beginning with plan years starting after December 31, 2025, employees will be able to contribute up to $7,500 per household to a DCFSA, up from the current $5,000 limit. For married individuals filing separately, the maximum will rise from $2,500 to $3,750.

This long-awaited update reflects rising childcare costs and provides a meaningful tax advantage for families who rely on these accounts.

What Is a Dependent Care FSA?

A Dependent Care FSA is an employer-sponsored benefit account that allows employees to set aside pre-tax dollars to pay for qualified dependent care expenses. By contributing through payroll deductions before taxes are applied, participants lower their taxable income — effectively reducing the cost of care.

Eligible expenses typically include:

• Daycare, preschool, or nursery school programs
• Before- and after-school care
• Summer day camps (when primarily for care, not education)
• In-home childcare providers or nannies
• Adult daycare for dependent adults who are unable to care for themselves

Expenses must be necessary for the employee (and spouse, if applicable) to work, look for work, or attend school full-time.

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How Families Benefit from the Higher Limit

Raising the annual limit to $7,500 means families can shelter an additional $2,500 of income from taxes. The actual savings depend on a household’s tax bracket, but even moderate earners could see hundreds of dollars in annual tax savings.

For example:

• A household in the 22% federal tax bracket contributing the full $7,500 would save roughly $1,650 in federal income tax.
• Under the previous $5,000 limit, that same household saved about $1,100.
• The additional $2,500 in pre-tax contributions could result in $550 more in annual savings, not including potential state tax benefits.

Given that the average cost of full-time childcare in the U.S. can exceed $10,000 per year per child, this increase helps working parents cover a greater portion of those expenses with pre-tax dollars.

Why This Matters:

• Reduces taxable income, which can save hundreds or even thousands of dollars annually.
• Makes it easier to budget for childcare and dependent care costs throughout the year.
• Encourages families to use pre-tax dollars for eligible expenses, stretching their dollars further.

Tips for Maximizing Your DCFSA:

1. Estimate your dependent care costs carefully to avoid over- or under-contributing.
2. Keep detailed receipts for daycare, babysitting, or eldercare services.
3. Coordinate contributions with your employer’s payroll schedule to maximize savings.

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Employer Implementation

Employers that offer a Dependent Care FSA will need to amend their Section 125 cafeteria plan to adopt the new limit once it becomes effective. It is not automatic. Employers should coordinate with their third-party administrator (TPA) or benefits consultant to ensure timely updates and employee communication during open enrollment for the 2026 plan year.

Additionally, plans must still comply with nondiscrimination testing rules to ensure highly compensated employees do not receive a disproportionate benefit.

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Interaction with the Child and Dependent Care Tax Credit

The DCFSA increase may also affect how employees use the Child and Dependent Care Tax Credit (CDCTC). Taxpayers cannot claim the credit for the same expenses reimbursed through a DCFSA, so strategic planning may be necessary to determine which option provides greater tax benefit based on income and filing status.

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Why This Matters

The $5,000 DCFSA limit had remained unchanged since 1986. In that time, the cost of childcare has risen dramatically, making the previous cap increasingly inadequate. Adjusting the limit to $7,500 brings the benefit closer to the realities of today’s working families and acknowledges the financial strain of dependent care expenses.

For employers, this change offers an opportunity to enhance benefit competitiveness without increasing direct costs. For employees, it represents a simple and tax-efficient way to stretch their childcare dollars further.

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Key Takeaways for Employers and Employees

• Effective date: Plan years beginning after December 31, 2025 (likely the 2026 plan year).
• New annual limit: $7,500 per household; $3,750 if married filing separately.
• Action required: Employers must update plan documents and payroll systems.
• Savings potential: Hundreds of dollars in annual tax savings, depending on tax bracket.
• Eligible expenses: Daycare, preschool, before/after-school care, summer day camp, and adult dependent care.

Final Thoughts

The increase in the DCFSA limit is a long-overdue adjustment that will provide tangible relief for families balancing work and caregiving responsibilities. As childcare costs continue to climb, this change underscores the importance of proactive benefits planning and communication.

Employers and brokers should begin discussing plan amendments now to ensure a smooth rollout for employees ahead of the 2026 plan year.

📞 Need Assistance?
We’re here to help you navigate these 2026 FSA changes! Whether you’re an individual looking to maximize your benefits or an employer aiming to update your plans and support your team, contact our team today for personalized guidance and support tailored to your needs.

Sources

• IRS Rev. Proc. 2025-19 Read More
• SHRM (Society for Human Resource Management), IRS Announces 2026 FSA Limits, 2025 Read More
• Employee Benefit Research Institute (EBRI), Flexible Spending Account Limits and Updates Read More
• Hill Ward Henderson P.A., Dependent Care FSA Limit Increased to $7,500 for 2026 Read More

This article is intended to provide general information on Dependent Care Flexible Spending Accounts (DCFSAs) and related employee benefit updates. It should not be construed as legal, tax, or financial advice. The information provided is not a substitute for professional consultation regarding your organization’s specific benefit plan or compliance obligations. For guidance tailored to your situation, please consult a licensed attorney, tax advisor, or benefits professional. © 2025 Apex Benefit Group. All rights reserved.