On May 10, the IRS issued Notice 2021-26, which offered clarifying guidance on certain taxation issues related to employees’ participation in dependent care assistance programs (DCAPs)—including Dependent Care FSAs—during 2021 and 2022. Specifically, it addresses the temporary increase in the maximum gross income exclusion (the “annual limit”) to $10,500 for the 2021 tax year, and how it interacts with the special unlimited carry over and extended claims periods for plan years ending in 2020 and 2021.
The primary guidance is that amounts attributable to previously issued carryover and extended grace period relief are generally NOT taxable for 2021 and 2022.
Some of the specific highlights include:
In much-anticipated guidance, the Internal Revenue Service has offered its insight on the implementation of the COBRA temporary premium subsidy provisions of the American Rescue Plan Act of 2021 (ARPA) in Notice 2021-31, issued May 18, 2021. The Notice discusses the background of the subsidy and includes 86 questions and answers (Q&As) about its application.
The ARPA subsidy covers 100% of COBRA and state mini-COBRA premiums from April 1–Sept. 30, 2021, for certain assistance-eligible individuals whose work hours were reduced or whose employment was involuntarily terminated. The subsidy is funded via a tax credit provided to employers, insurers or group health plans, according to the terms of the statute.
Plan administrators are subject to new requirements to notify individuals who may be eligible for this relief, including a notice that must be provided by May 31, 2021.
Among the topics covered by the 40-page Notice are how to calculate and claim the tax credit, including when a third-party payer is involved. According to the guidance, employers must document individuals’ eligibility for COBRA premium assistance to claim the credit.
The FAQs in Notice 2021-31 are helpfully organized by topic, starting with who is eligible for COBRA premium assistance, and ending with how employers claim the federal tax credit to pay for the subsidy. Given the expansive information covered by the Notice, this update includes just some key highlights of what the Q&A further clarifies, including:
Employers must maintain documentation substantiating individuals’ eligibility for the subsidy.
This Legal Update is not intended to be exhaustive, nor should any discussion or opinions be construed as legal advice. Readers should contact legal counsel for legal advice.
This article is for educational purposes only. The tax and legal references attached herein are designed to provide accurate and authoritative information with regard to the subject matter covered and are provided with the understanding that LoVasco Consulting Group is not engaged in rendering tax or legal services. If tax or legal advice is required, you should consult your accountant or attorney. LoVasco Consulting Group does not replace those advisors.
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