Dependent Care and What it Means
In recent years, the Federal Government has passed several pieces of legislation to offer relief and much-needed flexibility to employers that offer dependent care assistance programs (DCAPs). But many employers are struggling to make these benefits attractive to all levels of their workforce who may not see the value in putting away pre-tax dollars for care of children. However, DCAP assistance and the expanded Dependent care tax credit is a benefit many should reconsider.
There are two main requirements for care-related expenses reimbursable under a dependent care FSA or DCAP. The care must be “employment-related”, and the expense must be for a “qualifying individual”. We will discuss these further below. There are factors in these two criteria that many do not consider or realize.
The factors to consider whether to allocate funds into a pre-tax DCAP, include the following:
- Dependent care must be employment-related, meaning they enable the employee and a spouse to be gainfully employed.
- In most cases, employees or their spouse who works from home or is self-employed can still be eligible.
- The dependent care assistance can be available if the employee’s spouse is a full-time student or actively searching for employment.
- Employment-related work can be full-time or part-time to qualify—as long as the daycare expense enables the individual to work, which must be at least one hour in that day to qualify.
- Gainful employment is determined on a daily basis so expenses must be allocated for only days in the week in which the employee worked.
- If a daycare provider charges on a weekly or monthly basis that cannot be allocated between workdays and non-workdays, the employee is permitted to claim expenses for the full period.
- Qualifying individual will be a child under the age of 13, meaning for services provided prior to the day the child turns 13.
- The reimbursable requirement is that the service must be provided when the child is under age 13.
- In most cases, the employee will have eligible dependent care expenses for the period of the year prior to the child reaching age 13.
- Expenses incurred when caring for a parent or disabled child over the age of 13 could qualify as dependent care expenses, provided the individual is a qualifying individual.
- In order to take a distribution from the DCAP, the individual must be a tax dependent.
- Standard tax dependent requirements include a primary requirement that the individual live as a member of the household all year and the employee must be responsible for more than half of the individual’s support.
- The employee can choose to change their DCAP election upon experiencing any change including maternity leave.
- The employee may choose to revoke the dependent care FSA election because of any change in the use of daycare, change in daycare provider, or a change in an existing daycare provider’s costs.
- Although the employee’s current daycare-related costs may not reimbursable during the spouse’s leave, the employee can continue making the regular contribution in anticipation of later-year expenses that will qualify for reimbursement.
Employers should not actually assist employees with making the determination of whether to contribute to a dependent care FSA, recognize dependent care tax credit, or any other tax implication option, but employers should include some type of communication that informs employees of their expanded opportunities.
As a reminder, employers that decide to increase their dependent care FSA amounts will need to amend their plan by the end of the plan year in which the change is effective.
As always, we recommend that all parties consult with a tax advisor or carefully review their situation.