Dependent Care Assistance Program FSAs (DCAP)
A DCAP is an employer sponsored benefit plan which provides assistance to employees with dependent care. Employees can use the DCAP benefits to provide care to qualified individuals so that they can work. Regulations allow employers to exclude the value of the DCAP benefits provided to an employee from their wages, given the employer can reasonably believe the employee can exclude the benefits from their gross income for dependent care. The benefits can be in the form of cash or as a benefit. For example, if an employer offers on-site childcare at no cost to its employees, and an employee uses the benefit, a fair market value of the services used would be reported for childcare expenses on the employee's W2.
Qualifying persons for whom DCAPs can be used
A qualifying person, for whom the DCAP can be used, is an employee's dependent child, whom was under age 13 when the care was provided, the employee's spouse, and other individuals who are physically or mentally incapable of self-care and whom can be claimed on the employee's IRS tax return.
DCAP tax advantage
An employee can generally exclude up to $5,000 from his or her gross income under a DCAP each year, and $2,500 for married employees filing separate tax returns. The exclusion cannot be more than the lesser of the earned income of either the employee or the employee's spouse (exceptions are students and those individuals that are unable to care for themselves.) DCAP limits remained the same for 2014, 2015 and 2016.
There are also exceptions for highly compensated employees. An employer cannot exclude DCAP benefits from the wages of a highly compensated employee unless the benefits provided under the program do not favor those individuals, and the program meets the requirements described in IRS 129(d) for DCAPs. A highly compensated employee for 2015 is an employee who was a 5% owner at any time during the prior year, received more than $115,000 in pay, or fell in the top 20% of employees when ranked by pay for the prior year. The income threshold for highly compensated employees for 2015 and 2016 is $120,000.
This content is being provided as an informational tool. It is believed to be accurate at the time of posting and is subject to change. It is recommended that plans consult with their own experts or counsel to review all applicable federal and state legal requirements that may apply to their group health plan. By providing this information, Meritain Health is not exercising discretionary authority or assuming a plan fiduciary role, nor is Meritain Health providing legal advice.