The annual employee contribution limit for dependent care flexible spending accounts (FSAs) is increasing by 50% beginning next year, a change employers will want to communicate to employees as open enrollment season gears up.
The massive tax law that President Donald Trump signed July 4, known as the One Big Beautiful Bill Act, raises the limit for the pretax benefit account used to pay for eligible dependent care services to $7,500 for single individuals and married couples filing jointly, up from $5,000, and $3,750 for married couples filing separately, up from $2,500. The increase is effective beginning Jan. 1, 2026.
Industry experts have been pushing for a higher contribution limit for years, calling the new increase long overdue. Although other limits, such as for health savings accounts and medical FSAs, are indexed for inflation and usually increase nominally each year, that’s not the case for dependent care FSAs. The current limits have been in place since 1986, except for a temporary increase during the pandemic.
The increase is a “game changer for both working parents and businesses,” said Sara Redington, co-founder of The Best Place for Working Parents (BP4WP), a Fort Worth, Texas-based organization that recognizes employers supporting working parents.
“This higher limit offers parents an excellent opportunity to use pretax dollars for various caregiving expenses, such as nannies, summer camps, pre-K programs, and even elder care,” she said.
Although many observers were hoping for a bigger boost to the limit, the “long-awaited” increase “gets working families a little closer” to covering their child care costs, said Laura Bibb, associate vice president and ERISA compliance attorney at Lockton in Chapel Hill, N.C.
The increase gives employees an opportunity to set aside pretax dollars for eligible dependent care expenses. Supporting working parents and other caregivers has been a growing priority for employers, with many focusing on an array of benefits to help.
Although many say dependent care FSAs are a valuable benefit, the offering’s popularity has decreased in recent years.
Just over half of employers (54%) offer the accounts in 2025, down from 58% in 2024 and 65% in 2021, according to the SHRM 2025 Employee Benefits Survey.
Offering dependent care FSAs can be a boon for employers, Redington said.
“Dependent care FSAs have proven to be a powerful tool for attracting and retaining talent, especially for companies unable to offer flexibility or remote work benefits that are highly sought after today,” she said.
For example, at American Airlines, a BP4WP member, approximately 40% of the employees who use dependent care FSAs are flight attendants and pilots — “two groups with impressive retention rates,” averaging 20 years and 19 years of tenure, respectively, Redington said.
She added that companies also receive tax benefits, “making this policy a win-win for both employees and the bottom line.”
Employer Next Steps
For employers, the contribution limit increase presents an opportunity as well as a compliance responsibility.
Employers that want to implement the increased limit should work with their flexible benefits plan administrator to amend the plan’s legal documents and communicate the changes to employees for the upcoming open enrollment season, Bibb said. (Employers are not required to allow workers to contribute the maximum amount to a dependent care FSA, as contribution limits are determined by the employer’s plan design, which may be lower than the federal maximum, Bibb explained.)
Redington agreed, adding that employers that offer a dependent care FSA option should begin communicating now regarding the higher limit that’s set to take effect next year.
“Take this opportunity to educate employees about the wide range of expenses these accounts can cover,” she said. “Many companies struggle with low utilization [rates] simply because employees aren’t fully aware of the benefits available to them. Clear, consistent communication about your offerings is essential to boosting employee engagement, improving retention, and maximizing the ROI of your benefits package.”
For employers that don’t offer a dependent care FSA, now may be a good time to reconsider doing so. To decide whether it’s the right fit for your workforce, Redington suggested conducting an annual employee survey to “help uncover where your employees fall on the caregiving continuum and identify which benefits will have the greatest impact.”
“By tailoring your offerings to their specific needs, you can ensure your benefits truly support your workforce and avoid providing perks that may go unused,” she said.
Employers will also want to consider a couple of compliance issues, Bibb said. Under the Internal Revenue Code, dependent care FSA plans cannot discriminate in favor of highly compensated employees. These plans often have issues passing required nondiscrimination testing, specifically the 55% average benefits test (a utilization test), if there are more highly compensated employees participating than non-highly compensated employees, she explained.
“We anticipate that employers who have struggled to pass this test will continue to do so, as highly compensated employees are likely to continue contributing at the maximum annual limit,” Bibb said. “To combat testing issues, employers may want to consider communication campaigns and other strategies — such as matching contributions of non-highly compensated employees — to encourage more non-highly compensated employees to participate.”
