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What Does a Dependent Care Assistance Program Cover?

 

A Dependent Care Assistance Program is an employer-sponsored flexible spending account that helps employees pay for the care of a qualifying dependent, such as a young child, a disabled spouse or a legally dependent parent. Employers can assist with this expense by:

  • Making payments to third parties who deliver care.
  • Providing a dependent care facility for employees.
  • Reimbursing employees for dependent care expenses.

Most employers that offer a DCAP choose the third option: reimbursement. Basically, the employee contributes to the DCAP, by way of payroll deductions, with pretax money. That money is used to reimburse the employee for qualifying expenses.

Before processing an employee's request for reimbursement, it's important to know the respective rules.

Under Internal Revenue Code Section 129, reimbursement through a DCAP is permitted if:

  • The plan document for the DCAP allows the reimbursement.
  • The expense is work-related, meaning it enables the employee and his or her spouse to be gainfully employed.
  • The expense is for the care of the qualifying dependent.

The following expenses are reimbursable:

  • Babysitters who work inside or outside of the employee's home. The sitter cannot be the employee's spouse or dependent. Babysitting expenses incurred for personal reasons — such as the employee going out to eat with his or her spouse — are not reimbursable, since the expense must be work-related.
  • Relatives who care for the employee's dependents, as long as those relatives are not dependents of the employee. For example, the employee cannot be reimbursed for paying his or her 16-year-old child to babysit his or her infant child.
  • Nannies or au pairs who provide care in the employee's home.
  • Housekeepers who perform dependent care duties.
  • Day camp, as long as the reason is related to the care and well-being of the child. For example, sending the child to an overnight camp would not be reimbursable since it's not a work-related expense.
  • Dependent care centers, such as child care or day care facilities, that comply with state and local regulations.
  • Care for an elderly dependent who spends at least eight hours per day in the employee's home.
  • Nursey schools, preschools and similar pre-kindergarten programs that focus on care and well-being instead of on education.
  • Transportation, if the person delivering the care provides the transportation and the travel occurs to and from the place of care.
  • Fees and deposits attributed to dependent care. For example, application fees and deposits paid to a child care agency are eligible. Also, late fees resulting from late pickup of a child from a day care center are eligible, since the fees are for additional care. However, fees for late payment are not eligible.

Note that this list is by no means exhaustive. There are many other potentially eligible expenses — such as those associated with backup or emergency care, clothing, and entertainment. So be sure to seek clarification as necessary.

 

 

 
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Our firm provides the information in this e-newsletter for general guidance only, and does not constitute the provision of legal advice, tax advice, accounting services, investment advice, or professional consulting of any kind. The information provided herein should not be used as a substitute for consultation with professional tax, accounting, legal, or other competent advisers. Before making any decision or taking any action, you should consult a professional adviser who has been provided with all pertinent facts relevant to your particular situation. The information is provided "as is," with no assurance or guarantee of completeness, accuracy, or timeliness of the information, and without warranty of any kind, express or implied, including but not limited to warranties of performance, merchantability, and fitness for a particular purpose.
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