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The contribution limit for dependent care flexible spending accounts (FSAs) is set to increase from $5,000 to $7,500 annually next year due to a provision in the recently enacted Republican tax bill.
This means that employees with dependents may set aside up to $7,500 pre-tax dollars to use on expenses like daycare or preschool ($3,750 for married individuals filing their taxes separately). FSAs are the most common family care benefit employers offer, according to SHRM, ahead of childcare referral services or backup care.
But employers are still considering whether to adopt the increased FSA contribution limit, according to a flash poll of 903 clients conducted by consulting firm Mercer on August 7. Forty-three percent of clients surveyed said their organization was “still considering” whether to take advantage of the new limit, while 39% said they planned to do so for all employees, and 10% said they didn’t plan to do so.
FSA considerations for benefits leaders. One issue HR teams will need to take into account when deciding whether to increase their organization’s FSA contribution limit is what usage among highly compensated employees might look like.
US tax code bars employers from offering dependent care FSA plans that discriminate in favor of “highly compensated” employees; in 2025, this classification refers to employees who earn more than $160,000 a year.
Businesses must pass a series of tests to demonstrate their programs don’t favor these employees, and historically the “55% average benefits test” has been hardest for employers to clear, Rich Glass, a principal with Mercer’s law and policy group, said during an Aug. 7 webinar with clients. In order to pass, employers must show non-highly compensated employees receive 55% of the dependent care assistance benefits given to highly-compensated ones, on average. This may be difficult, particularly with a $7,500 contribution threshold, given highly compensated employees are more likely to make higher contributions to a dependent care FSA.
“A failure to test carries the risk of all [highly compensated employee] contributions becoming taxable,” Glass explained.
The Mercer data suggests employees are taking the potential effects of non-discrimination testing on their dependent care FSA programs into account, as 9% of respondents said they’re only planning on raising the annual contribution limit for certain employees—i.e., those who aren’t considered highly compensated.
“I suspect that that number may increase over time as more people digest this information,” said Dorian Smith, partner, national practice leader with Mercer’s law and policy group.
It’s worth noting that workers also have the option to claim the Child and Dependent Care Tax Credit (CDCTC) for child care expenses on their federal tax returns, and in 2026 this credit will also go up due to a change in the tax bill. Low-income families may receive a credit of up to 50% on $6,000 worth of expenses for two children, up from the previous 35%. Employees can’t claim the same expenses for both a dependent care FSA and the CDCTC, though.
Ultimately, employees’ decision on whether to take advantage of a dependent care FSA or the CDCTC is “highly individualized,” and likely to depend on workers’ gross income and the taxation rates where they reside, Glass said.