On Monday, the IRS clarified that the balances of the dependent care assistanceplan would be carried forward with regard to Notice 2021-26, under temporarypandemic relief provisions to keep their exclusion from wages and gross incomeof participating employees.
With the authorization of section 129, dependent care assistance plans allowprohibition from employees’ gross income incurred or paid by the employer inregard to dependent care assistance offered to their employees.
Usually, employees get these benefits from a cafeteria program, which is treated as adependent care flexible spending account that reimburses or pays for listeddependent care expenditures incurred by the employee.
According to the Melbourne accountant, there is a limit on employees’ incomeexclusion in tax years starting before 01 January 2021 and will be operableeven after 31 December 2021, that might cost around $5000 tax per year (and ifa married spouse is filing tax separately then it is determined up to $2500).
Or, in case it is less, the earned income of employees (or employees’ wives) wouldbe considered for the tax year. According to the American rescue plan act (P.L.117-2), the beginning of the tax year is in 2021 only, while those max incomeexclusions are raised to $5250 and $10500, respectively.
However, if any benefit remains unused by the end of year plan, employees will begranted a 2 ½ -month grace period to use those benefits only if their plancomes under Notice 2005-42.
Taxation Policy During This Pandemic
Clauses (a) and (b) of section 214 under the Taxpayer Certainty and Disaster Tax ReliefAct of 2020 (TCDTRA), authorized as the division EE under the ConsolidatedAppropriations Act, 2021, P.L. 116-260, allowing employees to extend the lengthof claiming unused benefits from 2020 to 2021 play year and then from 2021 plan year to 2022.
The TCDTRA section 214(c)(1) clarifies that plans might provide an extended periodof 12-month for claiming your unused benefits for the ending plan year 2020 or2021.
With regard to Notice 2021-15, in February, the IRS announced a temporarily extendedclaim or extended carryover period stated under the section of TCDTRA is yetnot taken into consideration for determining the limits of annual benefits forthe next year. You can have a look over the cafeteria plan stated by the IRS for this pandemic situation.
IRS Recent Guidance
The recent announcement on Monday has simplified that dependent care assistanceplan advantages, which are supposed to be excluded from employees’ income ifthey used it by the end of the tax year 2020 or remain exclusive for exclusionfrom the gross income of employees.
Otherwise, benefits are disregarded for any purpose regarding application limits for thenext tax year. Employees are allowed to carry over by the end of the plan year2020 or 2021 or eligible to use their benefits up to an extended claimingperiod.
According to accountants Melbourne, the Notice also explains the implication ofthis relief program with examples and maximizes benefits up to $10500 under theARPA for the beginning of the plan year 2021 and closing in 2022.
