Dependent Care Assistance Plans
Below are Employer and/or Employee Paid Benefits that assist employees with child care costs, whether by direct contribution, reimbursement or payroll deduction. DCAP is an employee benefit, established in accordance with Sections 125 and 129 of the IRSCode, under which a maximum of $5000 tax free can be used to pay for dependent care.
A DCAP may be part of a flexible benefit plan or stand alone as a flexible spending account. It can be employer paid, employee paid or a combination of the two.
Under an employer paid plan, the employer can reimburse employees for some or all of their child care expenses or pay the provider directly. This payment is a tax-deductible business expense.
Under an employee paid plan, the employee can set aside a portion of salary for dependent care costs. The employee saves money because no Federal, State and Social Security taxes are paid on the salary set aside. The employer also saves the FICA and the unemployment tax on this portion of the employee’s salary.
- The combined total of employer and employee dollars and the child care tax credit cannot exceed $5,000.
- If an employer subsidizes child care without a DCAP in place, the employee is subject to tax on the amount of the subsidy.
Many small businesses choose vendor plans which allow employers to purchase slots for their employees’ children in existing child care programs. Slots are then made available as a tax-free benefit or offered at a discount to their employees.
For more information regarding DCAP benefits please visit the Internal Revenue Service website