Test Your Dependent Care FSA Plan Early

By Vita on January 8, 2026

test-dependent-care-fsa-plan

With the increase in dependent care contribution limits to $7,500, the importance of preliminary discrimination testing is critical.

Limits Increased
The contribution maximum for dependent care FSA plans has been stagnant at $5,000 per year since 1986. For 2026, the limit was increased to $7,500 per year ($3,750 for married individuals filing separately). The new limit has a built-in Cost of Living Adjustment (COLA) escalator for future years. This is a welcome change to the tax code for families using the benefit.

Impact on Nondiscrimination Test
Many experts project that this change will result in higher elections among Highly Compensated Employees (HCEs) than among Non-Highly Compensated Employees (NHCEs).

The suite of dependent care discrimination tests can be some of the more difficult tests to pass. Specifically, the 55% Average Benefits Test compares the ratio of benefits elected by HCEs and by NHCEs. If, as expected, more HCEs increase their election to the new $7,500 maximum than do NHCEs, employers may have a more difficult time passing this test.

Employers who have had difficulty passing the test in the past are likely to experience more exaggerated failures in the future. In addition, many new employers will likely experience challenges with passing the test as NHCE/HCE election ratios potentially become more skewed.

It's Easier to Pass if You Do the Test Wrong
The 55% Average Benefits Test has been the subject of some controversy over the years. Some employers mistakenly complete the test by only including participants who have elected dependent care FSA benefits, not the entire population. This misconception, although convenient because it yields more favorable test results, is not consistent with regulatory guidance. Let’s look at an example:

	Total Number of Employees	Number of Employees Electing Dependent Care FSA	Average Election (of those Electing Dependent Care FSA)	Total Elections	Average Election (of All Employees)
NHCEs	10	5	$6,000	$30,000	$3,000
HCEs	5	4	$7,500	$30,000	$6,000
Ratio of NHCE/ HCE Elections			80%		50%

Incorrect Math = Test Passed

Average election of those electing dependent care FSA
→ $6,000 ÷ $7,500 = 80% (>55%)
Appears to pass, but uses incorrect data so yields an incorrect test result.

Correct Math = Test Failed

Average election of all employees
→ $3,000 ÷ $6,000 = 50% (<55%)
This is the correct calculation method, and the test fails.

Do Preliminary Testing Early
With open enrollment behind us and dependent care elections known for 2026 plan years, employers have the necessary information to run discrimination tests. As such, we recommend running the tests early in the year.

Early testing allows for confirmation that current elections are either fine . . . or not. If early testing shows the plan in jeopardy of failing, corrective action (lowering HCE contributions) can be taken early in the year and HCE expectations can be reset to reflect necessary election reductions. It should also be noted that unraveling contributions after reimbursements have already been made becomes a headache for employers. It is much easier to make any necessary corrections early in the plan year.

If you are a Vita Flex client, our standard process is to reach out in early April to begin nondiscrimination testing. This typically means results are available by the end of April, provided all required data is submitted promptly. If you would like to start testing sooner, please reach out to your Vita Flex Account Manager. We are happy to accommodate employers who wish to move their testing earlier in the year.

What if We Fail?
If the plan fails the discrimination test and corrections are not made within the plan year, all dependent care FSA contributions made by HCEs become taxable. This requires that employers correct taxable income in payroll and amend W-2s. Conversely, if the plan is tested and corrections are made, some HCE dependent care tax benefit can be retained.

Proactively testing and making any necessary corrections avoids the administrative burden of retroactive corrections and prevents unexpected tax consequences for highly compensated employees.

As an important point of context, a test failure is not an entirely bad thing. Even if HCE elections must be reduced to maintain compliance, the HCEs will still receive some pre-tax benefit. A reduced benefit is better than losing the tax-favored benefit entirely. Proactive adjustments help to preserve the maximum tax advantage possible for HCEs.

Resources

IRS Publication 503 – Child and Dependent Care Expenses

Test Your Dependent Care FSA Plan Early

Resources

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