A semiconductor device may include a substrate, source and drain regions in the substrate, a recessed epitaxial channel layer in the substrate between the source and drain regions, and a high-K gate dielectric layer overlying the recessed epitaxial channel layer. The semiconductor device may further include a gate electrode overlying the high-K gate dielectric layer, a dielectric cap layer in contact with top and sidewall portions of the gate electrode, the dielectric cap layer having a lower dielectric constant than the high-K gate dielectric layer, and source and drain contacts coupled to the source and drain regions.