Nondiscrimination Testing and the DCFSA contribution increase: What you need to know

Earlier this year, Congress passed H.R.-1, commonly referred to as the One Big Beautiful Bill Act which increased the Dependent Care Flexible Spending Account (DCFSA) maximum contribution amount to $7,500 from $5,000 ($3,750 for married employees filling separately) beginning January 2026.

The new contribution amount can be a great boost to your team members who rely on the account to help with child and adult care. However, this change may affect nondiscrimination testing (NDT), since the rules remain unchanged.

With an increase in DCFSA contributions, it may be more difficult for an employer to pass the 55% Average Benefits Test. Let’s discuss this test and others that may affect your compliance.

What is nondiscrimination testing?

Nondiscrimination testing is part of the Internal Revenue Code, which can make it seem a bit complex. But once you better understand NDT, you can better understand how the DCFSA contribution limit can impact NDT testing.

Essentially, NDT is a way to ensure plan designs do not discriminate in favor of highly compensated employees (HCEs) or certain key employees within the organization. In turn, it also ensures contributions made by and for non-highly compensated employees (NHCEs) are proportional to contributions made for HCEs.

NDTs can be organized into three basic groupings:

• Eligibility. If too many NHCEs are excluded from participation in the plan, then it will be discriminatory.
• Availability of benefits. The plan will not pass the nondiscrimination tests if the HCEs/key employees can access more or better benefits than NHCEs.
• Utilization. A plan will not pass the nondiscrimination tests if the HCEs/key employees actually elect more benefits under the plan.

Important nondiscrimination tests to know

With eligibility, availability, and utilization in mind, let’s review the three nondiscrimination tests:

• The 55% Average Benefits Test requires that the average dollar amount of benefits provided to NHCEs must be at least 55% of the average dollar amount of benefits provided to HCEs.
• The More-Than-5% Owner Concentration Test compares the DCFSA benefits provided for more-than-5% owners of a company with DCFSA benefits provided for non-owners. No more than 25% of the total DCFSA benefits provided for everyone in this benefit may be attributed to more-than-5% owners.
• The Eligibility, Benefits Available, and Contributions and Benefits Tests ensure that employers offer all benefits to an adequate number of employees, and that those benefits do not discriminate in favor of HCEs or key employees.

5 ways to improve the likelihood of passing your DCFSA NDT

While the DCFSA contribution limit is increasing, H.R.-1 did not make changes to DCFCA NDT requirements. You can take a few proactive steps to help increase the likelihood that your plan design does not discriminate.

1. Boost non-HCE participation: You can do this through targeted communication about the DCFSA benefit (particularly focusing on the tax advantages and eligible expenses.

2. Offer incentives to NHCEs: Consider an employer match (e.g., up to $500) for NHCEs with eligible dependent care expenses.

3. Limit HCE elections: For example, you could limit HCE elections to $3,000 while allowing NHCEs to elect the full $7,500.

4. Conduct early or interim testing: Consider running mid-year testing and adjust HCE elections if results indicated a risk of failure.

5. Customize maximum elections by employee group: You may want to set a lower plan maximum than the IRS limit for certain groups.

Note: Options 2, 3, and 5 must be adopted before the new plan year begins and reflected in your plan documents.

Next steps for NDT compliance

NDT isn’t just about meeting Internal Revenue Service requirements—it’s an opportunity to build trust and show your commitment to supporting your team’s benefits. With the DCFSA contribution limit increase potentially impacting your NDT, now is the perfect time to review participation trends and explore whether a customized plan design could help you stay compliant in 2026.

At HealthEquity, we’re here to help. Whether you have questions about the DCFSA contribution increase or need assistance with NDT, we’re ready to guide you. Contact your HealthEquity representative today to get started.