Some business owners are considering providing their employees with benefits which will ease the financial impact of childcare. DCAP, or Dependent Care Assistance Program is a great way to start, and below is what employers should know about it.
How Does DCAP Work?
Working parents will sometimes find themselves in scenarios where they will be faced with extra expenses related to childcare. Their employers can help, by providing specific benefits which can reduce the financial impact. One of the best is a care plan that is before tax dependent. DCAP is a system which gives employers the opportunity to provide assistance benefits to employees in a manner that is tax free.
To be eligible for it, each parent must be employed, or searching for employment. The dependent should live within the same residence and be claimed as the dependent on tax forms. They must also be under 13 years or age, or be physically or mentally disabled. In order to apply, an employee must enroll when open enrollment is available, but can also enroll at other times if their legal status changes. Examples of this would be a marriage, adoption or birth of a new child, divorce, or a change in job status.
Where Does DCAP Funding Come From?
Employees themselves are responsible for DCAP funding via deductions in their payroll. Whenever an employee incurs costs which are related to certain care expenses, like baby-sitting, they can acquire reimbursement via the DCAP account which has been allocated to them. DCAP must be in compliance with the guidelines that have been established within Section 129 of the Internal Revenue Code so that, dependent benefits can be provided which are tax free. Additionally, DCAPs give employees the opportunity to make contributions pretax which are associated with Section 125.
What Benefits Do Employees And Employers Gain By Using DCAP?
Since the account is before tax, this means that it lowers the amount of an employee’s income which is liable for taxation. For employers, especially those that operate small businesses, the benefits will come in the form of reduced payroll tax, as well as lower taxes which are associated with FICA. Employers also benefit from being able to write off costs which are associated with plan administration, depending on the manner in which company taxes are filed.
However, there are a few important points which should be mentioned. Parents cannot take child related tax credits for all expenses which are paid out of their DCAP accounts. It is also critical to plan well in advance, because if DCAP funds aren’t used by a specific deadline, they will be lost. You also have to make sure the things you are paying for qualify within the plan, and remember that activity costs which are not related to daycare aren’t eligible. Finally, dependent care may not be reimbursed until which time services have been rendered.