Dependent Care Benefits

Brought to you by the insurance professionals at LHD Benefit Advisors Dependent Care Benefits Expenses may only be reimbursed after the dependent care services have been performed. For example, if a dependent Section 129 of the Internal Revenue Code (IRC) provides for care provider requires payment at the beginning of the week, dependent care assistance programs (DCAPs). A DCAP is an the employee may not seek reimbursement until the end of employer-sponsored benefit plan that allows employees to the week. pay for certain dependent care expenses on a tax-free basis, What household services are eligible for up to a specified limit. DCAPs are also commonly referred to reimbursement? as dependent care flexible spending accounts, or dependent care FSAs. Common eligible DCAP expenses include Reimbursable household services are ordinary and usual babysitting and day care costs incurred while the employee services necessary to the maintenance of the household that and his or her spouse are working. are performed in and about the taxpayer’s home and attributable to the care of the qualifying individual. Services This article provides a brief overview of DCAPs. provided by chauffeurs, bartenders or gardeners are not What is a DCAP? eligible for reimbursement from a DCAP. A DCAP is an employer-sponsored program that helps What expenses for the care of a qualifying individual employees with the cost of dependent care expenses. It are eligible for reimbursement? establishes an account from which an employee may seek Expenses for the care of a qualifying individual are reimbursement for eligible dependent care expenses. In most reimbursable where the primary function is to ensure the cases, a DCAP account is funded by employees with pre-tax individual’s well-being and protection. Expenses for food, dollars through payroll deductions. lodging, clothing or education are not eligible, unless these A DCAP may be offered within a cafeteria plan or as a goods and services are incidental to and inseparably part of separate plan. When a DCAP is offered within a cafeteria the care. plan, it is subject to the same rules that govern cafeteria IRS regulations include an example where a preschool child plans. care service includes meals for the students, and the cost of What dependent care expenses are eligible for meals is not separated from the cost of child care. In this reimbursement? example, the cost of meals is considered incidental to and A dependent care expense is eligible for reimbursement from inseparably part of the care. Therefore, the employee may a DCAP if it is an employment-related expense. An seek reimbursement for the full cost of the preschool employment-related expense must: program without allocating any portion of the expense to meals. • Be primarily for the care of a qualifying individual or for household services attributable in part to the qualifying individual’s care; and • Enable the taxpayer to be gainfully employed. This Benefits Insights is not intended to be exhaustive nor should any discussion or opinions be construed as professional advice. © 2019-2020, 2022 Zywave, Inc. All rights reserved.

If a portion of an expense is for care of the qualifying Who is a qualifying individual? individual and a separate portion is for another purpose, IRS A qualifying individual includes: regulations clarify that an allocation can be made to allow the • The taxpayer’s dependent who is under the age of employee to be reimbursed for the portion of that expense 13; or that is attributable to caring for the qualifying individual. However, an allocation is not necessary if the portion of the • The taxpayer’s dependent or spouse who is expense for the other purpose is minimal or insignificant. physically or mentally incapable of self-care and who IRS regulations provide the following guidance regarding has the same principal place of abode as the specific expenses that are eligible for reimbursement under a taxpayer for more than half of the taxable year. DCAP and those that are not eligible: Individuals are physically or mentally incapable of self-care if, Eligible Expenses as a result of a physical or mental disability, they are incapable of caring for their own hygiene or nutritional needs, • Expenses for a nursery school, preschool or similar or require full-time attention of another person for their own program below the level of kindergarten are eligible. safety or the safety of others. The individual’s inability to engage in any substantial gainful activity or perform the • Expenses for before- or after-school care of a child in normal household chores or care for minor children does not kindergarten or a higher grade are eligible. in itself make the individual physically or mentally incapable • Day camp expenses, including specialty camps such of self-care. as sports or computer, are eligible. Whether someone is a qualifying individual must be • Expenses for transportation provided by the calculated on a daily basis. For example, upon a dependent’s dependent care provider to or from the place of care 13th birthday, the employee may no longer seek are eligible. The cost of transportation provided by reimbursement for dependent care expenses incurred after anyone else is not eligible. his or her dependent’s birthday. Employees should take into • Employment taxes paid to a caregiver are eligible. consideration the daily calculation requirement when making their annual elections. • Expenses related to providing room and board to a What constitutes gainful employment? caregiver may be eligible. Gainful employment may consist of service within or outside • Indirect expenses such as application fees, agency the taxpayer’s home, including self-employment, and time fees or deposits paid to obtain dependent care spent actively seeking gainful employment. Time spent services are eligible. actively seeking gainful employment includes time spent as a Ineligible Expenses full-time student in an educational organization. Where the purpose of the expense is to enable the taxpayer and the • Expenses for kindergarten or higher grade levels are taxpayer’s spouse to be gainfully employed depends upon the not eligible. facts and circumstances of the particular case. Whether an • Expenses for overnight camps are not eligible. expense was related to gainful employment is calculated on a daily basis. • Payments to either the taxpayer’s spouse or to a If an employee is married, the employee’s spouse must be parent of the taxpayer’s child who is not the employed (including self-employed), be actively seeking taxpayer’s spouse are not eligible. gainful employment or be a full-time student in an educational organization during the time that the employee seeks reimbursement of dependent care expenses.

IRS regulations provide the following guidance related to employment-related expenses that enable the taxpayer to be gainfully employed: • Work as a volunteer or for nominal consideration is not gainful employment. • Where dependent care expenses are paid on a weekly, monthly or annual basis, the taxpayer is not required to allocate expenses incurred during short, temporary absences from work, such as for minor illness or vacation. • Part-time employees may only seek reimbursement for dependent care expenses incurred on the day in which the employee works. If the employee works at least one hour, dependent care expenses for that day are eligible. • If a child care center requires payment for periods of no less than one week, but a part-time employee only works four days each week, the employee may seek reimbursement for day care expenses equal to the weekly rate. • Enrollment in night school constitutes full-time enrollment in an educational organization. Is there a limit on how much money may be contributed to a DCAP? Yes. IRC Section 129 allows a married employee who files a joint tax return or an unmarried employee to place up to $5,000 per calendar year in a DCAP. A married employee who files a separate tax return may only place up to $2,500 per calendar year in a DCAP. Additionally, under the dependent care tax credit of IRC Section 21, an employee may also be eligible to deduct eligible dependent care expenses on his or her tax return, provided those expenses were not reimbursed through a DCAP. Contact LHD Benefit Advisors today to learn more about DCAPs.