Establishing a corporate dependent care assistance program.

• Author: Ellentuck, Albert B.

A DEPENDENT CARE ASSISTANCE PROGRAM (DCAP) is a tax-favored arrangement by which the employer reimburses employees for dependent care expenses, makes payments to third parties for care of employees' dependents, or provides a dependent care facility for employees. The employer can deduct amounts paid or incurred under a qualified DCAP. Employees can exclude employer payments from income (subject to certain limitations) if the expenses would be employment-related for child care credit purposes if they were paid by the employee (Secs. 129(a)(1) and (e) (1)). While this column assumes that the employer makes a payment or reimbursement to the employees, if the employer maintains a dependent care assistance facility, employees can exclude amounts based on their use of the facility and the value of the services provided. Regardless, employees cannot claim the Sec. 21 dependent care credit for amounts excluded from income (Sec. 129(e)(7)).

Dependent care assistance includes employer payments or reimbursements for dependent care services necessary for the employee's gainful employment, including (1) expenses for household services incurred to provide care to qualifying persons and (2) expenses incurred to provide care to a qualifying person (Secs. 21(b)(2) and 129(e)(1)). The expenses must be primarily for the well-being and protection of the qualifying person.

To be a DCAP, a plan must meet the eligibility requirements of Sec. 129(d). If the plan does not meet the requirements to be a DCAP, it will still be treated as a DCAP in the case of employees who are not highly compensated employees. A highly compensated employee for dependent care purposes is an employee who (1) was a more-than-5% owner (directly or indirectly through family attribution (i.e., spouse, children, grandchildren, or parents) under Sec. 318) at any time during the current or preceding year or (2) for the preceding year, had compensation greater than $115,000 (for 2013 and 2014, as adjusted for inflation) and if the employer so elects, was in the top 20% of employees (based on compensation) for the preceding year.

Highly compensated employees who receive dependent care assistance under a plan that does not qualify as a DCAP under Sec. 129(d) cannot exclude the assistance from income (Sec. 129(d)(1)). Instead, the payments or reimbursements are subject to employment taxation and are reported as wages on the employee's Form W-2, Wage and Tax Statement. However, non-highly...