November is typically when companies have open enrollment for their benefit plans for the upcoming calendar year.
This summer, employers received a nice surprise when the Internal Revenue Service (“IRS”) issued proposed regulations for dependent care assistance plans (“DCAPs”), which clarified an issue that had bedeviled employers since 1981, when Congress added section 129 to the Internal Revenue Code to provide tax-favored treatment for DCAPs.
As explained below, the guidance in these regulations may have significant implications for employers who maintain DCAPs.
DCAP Nondiscrimination Testing
DCAPs are plans that typically are structured to permit employees to make salary-reduction contributions, which are returned in the form of tax-free reimbursements or payments for qualifying dependent care expenses. In addition to annual statutory benefit limits ($7,500 in 2026), DCAPs must satisfy four nondiscrimination tests: (1) a contributions and benefits test, (2) an eligibility test, (3) a test limiting benefits for more-than-5 percent owners to 25 percent of a plan’s annual benefits, and (4) a test which requires a plan’s annual average benefits for non-highly compensated employees (“NHCEs”) to be at least 55 percent of the average benefits of highly compensated employees (“HCEs”). The terms “NHCE” and “HCE” have the same definitions as those terms have under the 401(k) plan nondiscrimination testing rules.
The issuance of these regulations was prompted by a provision in the 2025 One Big Beautiful Bill Act legislation that created Trump Accounts. Employer-sponsored Trump Account contribution programs must satisfy nondiscrimination requirements akin to those applicable to DCAPs.
To read the full alert, please visit our website.
In the March 7, 2018 edition of the blog, we reported that as a result of a change in the 2017 tax legislation relating to the calculation of the cost of living adjustment to the annual dollar limit on contributions to a health savings account (“HSA”), the Internal Revenue Service (“IRS”) had announced that the maximum amount that may be contributed for 2018 to an HSA by an individual who has family coverage under a high deductible health plan was being reduced from $6,900 to $6,850.
Buried in the December 2017 tax legislation is a provision that changes the method that the Internal Revenue Service (“IRS”) uses to determine cost of living adjustments to annual dollar limits applicable to health plans and some other benefits.