Dependent care flexible spending accounts can be a valuable benefit for working families. They also come with a compliance question that is easy to overlook: Is the program benefiting highly compensated employees more favorably than everyone else?
The Treasury Department and IRS published proposed regulations on August 11, 2026, that would spell out how employers apply nondiscrimination rules to dependent care assistance programs (DCAPs). A dependent care FSA is a common type of DCAP. The proposal addresses eligibility, contributions and benefits, the 55% average benefits test, and a separate limit on benefits for certain owners.
These are proposed rules, not a new requirement that takes effect today. But they offer a useful reason to ask how your employer clients are testing their programs now.
What is the 55% test?
Under the existing statutory test, the average dependent care benefits provided to employees who are not highly compensated must be at least 55% of the average benefits provided to highly compensated employees. The issue can arise even when the FSA is offered on the same terms to everyone: employees may make different elections and use different amounts of the benefit.
The proposal would clarify the calculation. For this test, the average for each group would be based on employees who received more than $0 in dependent care benefits during the plan year. It would count benefits provided through salary reduction as well as employer contributions. Testing would be determined as of the last day of the plan year, taking into account eligible employees who received benefits at any point during that year.
That distinction matters. Offering the same election to everyone does not, by itself, settle the separate 55% average benefits test.
What else would the proposal clarify?
The proposed regulations would also provide more detail on three other parts of DCAP testing:
Contributions and benefits: A program offered on the same terms to all eligible employees could satisfy this requirement even when actual benefit amounts differ because employees elect or use different amounts.
Eligibility: An employer’s eligible group would need to reflect reasonable, objective business criteria and be nondiscriminatory in operation. The proposal describes both a numerical safe harbor and a facts-and-circumstances approach.
Owner concentration: The existing rule limits benefits for certain owners, shareholders, and their spouses or dependents to no more than 25% of the employer’s total dependent care assistance for the year. The proposal explains how this limit would be applied.
The rules also identify employees who may be excluded from certain tests, including employees who have not attained age 21 and completed one year of service, subject to the proposal’s conditions.
What happens if a plan fails?
One of the more practical parts of the proposal is a potential correction method for the 55% test and owner concentration limit. In certain cases, an employer could include excess benefits in the affected highly compensated employees’ or owners’ taxable income by the applicable Form W-2 furnishing deadline. The proposal also says a nondiscrimination failure generally would not take the favorable tax treatment away from non-highly compensated employees.
This is a proposed correction method for specific failures. It is not permission to skip testing or a universal fix for every DCAP issue.
What should brokers do now?
Start with three questions for the employer or its FSA administrator:
Who performs the DCAP nondiscrimination tests, and when?
Does the testing include the 55% average benefits test and the owner concentration limit, in addition to eligibility?
If a test fails, who coordinates the response with payroll and the employer’s tax adviser?
The opportunity for brokers is straightforward: make sure clients know that offering a dependent care FSA involves more than setting an annual election limit. A short conversation before year-end may reveal whether the employer has an actual testing process, the records needed to run it, and a plan for addressing a failure.
For now, keep the distinction clear: the statutory nondiscrimination requirements already exist; the detailed IRS framework discussed here is still proposed. The proposal says its DCAP regulations would apply to plan years beginning on or after a final rule is published.