The Section 129 dependent care assistance plan (DCAP) limit had been stuck at $5,000 for 40 years. Set by Congress in 1986 and never indexed for inflation, the $5,000 cap survived three decades of rising childcare costs, a brief pandemic-era bump, and repeated but unsuccessful attempts at legislative reform. The One Big Beautiful Bill Act (OBBBA) finally moved it. Effective January 1, 2026, the annual limit is $7,500 for single filers and married-filing-jointly, and $3,750 for married-filing-separately. The change is permanent and the new cap will be indexed for inflation going forward.
The rule sounds simple. The payroll administration around it is less so — the $5,000 figure is hardcoded into a lot of plan documents, enrollment platforms, and validation logic that has not been touched in a decade. Here’s what payroll pros need to know.
The short version
- Old limit (1986–2025): $5,000 single/MFJ, $2,500 MFS. Unchanged since enactment (except a temporary 2021 $10,500 bump under ARPA for one plan year only).
- New limit (2026 onward): $7,500 single/MFJ, $3,750 MFS. Per OBBBA, enacted 2025 and effective for tax years beginning after December 31, 2025.
- Indexing: New cap is indexed for inflation (IRS will publish annual COLA adjustments).
- Who’s eligible: Employees using a Section 129 dependent care FSA for employment-related care of a qualifying individual — child under age 13, or a spouse or dependent physically/mentally incapable of self-care.
- Tax treatment unchanged: Contributions through a Section 125 cafeteria plan are excluded from both federal income tax and FICA (SS + Medicare) wages. Employer-funded DCAP benefits outside Section 125 are excluded from FIT but remain subject to FICA.
- W-2 reporting: Amounts up to the limit appear in Box 10. Any amount above the limit is wages — added to Boxes 1, 3, and 5.
The math, worked out
For a married-filing-jointly employee electing the maximum in 2026:
| Scenario | 2025 | 2026 |
|---|---|---|
| Annual DCAP election | $5,000 | $7,500 |
| Pre-tax savings @ 24% FIT + 7.65% FICA | $1,582.50 | $2,373.75 |
| Additional 2026 tax savings vs. 2025 | — | $791.25 |
The employer also saves its matching FICA on the additional $2,500 in salary reduction: $191.25 per participating MFJ employee.
For married-filing-separately:
| Contribution type | 2025 | 2026 |
|---|---|---|
| DCAP election | $2,500 | $3,750 |
What didn’t change
- Lower-earning-spouse limit. For married couples, the DCAP exclusion is still capped at the lower of the two spouses’ earned income. A household where one spouse earns $4,000 cannot exclude more than $4,000 in DCAP, even if the election is $7,500.
- Dependent qualification. Still limited to children under 13 or a spouse/dependent incapable of self-care. No expansion of qualifying individuals.
- Use-it-or-lose-it. DCAP has no carryover option (unlike health FSAs, which allow up to $680 carryover in 2026). Unused balances are forfeited at the end of the plan year’s grace period.
- Employment-related purpose test. The care must enable the employee (and spouse, if married) to work or look for work. No change to the test.
- Election locks. Still irrevocable during the plan year absent a qualifying life event under Section 125 rules.
The Section 125 cafeteria plan amendment
The DCAP is almost always offered through a Section 125 cafeteria plan. The plan document needs to be updated to reference the new limit. Plans typically have language like:
“Contributions shall not exceed $5,000 per plan year ($2,500 for employees filing separately), subject to any changes in the limit under IRC Section 129.”
If your plan cites $5,000 as a fixed amount rather than cross-referencing the current Section 129 limit, it needs to be amended. Plans with limit language that dynamically references the statutory limit (“the limit under IRC Section 129”) automatically pick up the new cap — but even in that case, the employee-facing communications and enrollment portal usually show the dollar figure explicitly, and those need to be updated.
Administration checklist for payroll
- Amend plan documents by the first 2026 election cycle. If open enrollment is fall 2025 for a 2026 plan year, amendments need to be in place before election windows open.
- Test your payroll system’s validation logic. Most HRIS and payroll platforms hardcode the $5,000 limit in field validation. Run a test election at $7,500 before the first 2026 pay period to confirm the system accepts it and withholds correctly.
- Update W-2 Box 10 logic. Box 10 should show the employee’s total dependent care benefit up to $7,500. Amounts above the limit flow to taxable wages (Boxes 1, 3, 5). Confirm your year-end processing reflects the new threshold.
- Refresh open enrollment materials. Any “maximum $5,000” language in enrollment guides, benefits summaries, and election portals must be updated before the next enrollment cycle.
- Communicate to employees. Many participating employees will want to increase their election if payroll notifies them of the new cap. Send a one-paragraph update so they know to re-elect at open enrollment.
- Train benefits and payroll staff. Frontline employees who field DCAP questions need to know the new limit and the continuing nuances (lower-earning-spouse cap, use-it-or-lose-it, qualifying individuals).
- Watch the §129(d)(8) partial-year cap. Short plan years still prorate the annual limit — if a plan year runs less than 12 months in 2026, the cap is reduced proportionally.
Frequently asked questions
What is the OBBBA dependent care FSA limit for 2026?
$7,500 for single filers and married-filing-jointly. $3,750 for married-filing-separately. Effective January 1, 2026, per the One Big Beautiful Bill Act and IRS Rev. Proc. 2025-32.
Is this a permanent change or a temporary increase?
Permanent. Unlike the 2021 ARPA bump to $10,500, which applied to one plan year only, the OBBBA $7,500 cap is a permanent statutory change and will be indexed for inflation going forward.
When was the last time the DCAP limit changed?
1986. Congress set the $5,000 cap when Section 129 was enacted and did not index it to inflation. The 2021 ARPA $10,500 bump was temporary and expired after one year.
Do employees need to re-enroll to take advantage of the new limit?
Existing elections do not automatically increase. Employees who want to contribute more than $5,000 must change their election at their next open enrollment or at a qualifying life event.
Does the new limit affect the employer’s FICA savings?
Yes. Employees electing up to $7,500 through Section 125 save both FIT and FICA on the additional $2,500 above the old cap. The employer also saves its 7.65% FICA match on that amount.
Does OBBBA change the lower-earning-spouse rule?
No. For married couples, the exclusion is still capped at the lower of the two spouses’ earned income. A household with a $4,000 lower-earning spouse is still limited to $4,000 regardless of the $7,500 statutory cap.
Is there a carryover or grace period now?
No. DCAP remains subject to the same use-it-or-lose-it rules. Unlike health FSAs, which allow up to $680 in carryover for 2026, DCAP has no carryover provision.
Keep learning
- The SECURE 2.0 Enhanced 401(k) Catch-Up for Ages 60–63 — another 2026 change reshaping payroll
- 2026 Payroll Figures Quick Reference — every 2026 limit and threshold in one place
- W-2 Box 12 Codes Explained — reporting codes for cafeteria plan elections
Practice with PrepToPay
Section 125 cafeteria plan questions — including the new OBBBA DCAP limit, the lower-earning-spouse rule, and Box 10 reporting — are live on the CPP and FPC exams. PrepToPay’s bank includes multi-step scenarios that walk through the new $7,500 cap, the FICA impact, and the W-2 flow. Start your 14-day free trial on FPC or CPP. A valid payment method is required at signup; you will not be charged during the trial. Reference is $9.99/month with no trial.
PrepToPay is an independent exam preparation service not affiliated with, endorsed by, or sponsored by PayrollOrg (American Payroll Association). FPC® and CPP® are registered trademarks of PayrollOrg. Use of these marks is for descriptive purposes only. Study questions are written for exam preparation purposes based on publicly available KSA frameworks and do not guarantee exam success or reflect official exam content.