The pandemic caused many people to be unable to use the money set aside in their dependent care assistance programs in 2020 and 2021. In general under these plans, an employer allows employees to set aside an amount of pre-tax wages to pay for dependent care expenses.
An employee’s expenses are then reimbursed from the plan. The IRS just issued guidance on the taxability of these programs in Notice 2021-26. It explains what happens with money leftover in an employee’s dependent care assistance program in 2020 or 2021 because daycare wasn’t used due to COVID-19. Money that is carried over to plan years 2021 or 2022 will be excluded from gross income and not considered wages for 2021 or 2022.