Section 129 Dependent Care Assistance Plan FSA?
Section 129 of the Code allows employers to establish a Plan so their employees can establish special tax free savings accounts called a Dependent Care Assistance FSA Plan, or DCAP FSA. A DCAP is a special Flexible Spending Account (FSA) that enables an employee to make special pretax or tax free elections from their paycheck to pay for child and adult daycare expenses. The daycare expenses must be necessary to enable one or both parents or guardian to work, look for employment, or go to school.
Employers thinking about adding a Dependent Care Assistance FSA benefit can do so simply by establishing a written plan document, a requirement of the IRS, and distribute a benefit summary plan description to every employee, a requirement of the Department of Labor. Core Documents can provide you with everything you need to establish a Section 129 Dependent Care Assistance FSA FSA including the: Plan Document, Summary Plan Description, Election/Claim Forms and a complete Do-It-Yourself Administration Guide. The basic PDF plan document package delivered via email is only $129, the deluxe printed plan document package in 3-ring binder plus the PDF email version is $179.00. The two red arrows in the left side-bar indicate links to an Online Order form and a Fax Order Form.
See a recent Blog Post titled: Why Every Employer Should Have a Section 129 Dependent Care Assistance Plan (DCAP) Flexible Spending Account (FSA)
For state-of-the-art Online Administration, with a debit-card for every employee, see our Administration Link by clicking the dark-blue button at the top right of this screen.
Dependent Care Assistance Plan FSA Facts
Dependent Care Assistance FSA Plans allows employees to be reimbursed up to $5,000.00 annually for married couples, or up to $2,500.00 if the employee is married filing separately.
Who is a qualifying dependent for a Dependent Care Assistant FSA?
A qualifying dependent is a:
To claim dependent care expenses, employees must meet the following conditions:
Can a Dependent Care Assistance FSA Plan pay for a babysitter in the employee’s home rather than using a daycare facility?
Yes. Employees can include expenses paid to a babysitter if the services are necessary in order for the employee and their spouse, if married, to work, look for work, or for your spouse to attend school full-time.
Is day camp during the summer qualified childcare?
Yes, if attendance at that camp allows you and your spouse to work, look for work, or for your spouse to attend school full-time.
Is a private school tuition payments qualified childcare?
No. School tuition is not childcare. But before/after school care is a qualified expense. The employee’s provider may be required to itemize the costs between tuition and before/after school care.
Does the employee have to submit an identical claim amount every week or can they set up an automatic reimbursement?
Employees must submit a claim every time they wish to request reimbursement of an expense. There is no automated process. Many individuals file claims monthly to eliminate weekly claim submission. However, it truly depends on the employee’s specific needs and whether they can wait until the end of the month for reimbursement or if they need to receive funds weekly. Regardless of the amount on their claim they will only be reimbursed up to the amount in their account at that time.
Can employees be reimbursed for dependent daycare expenses once they have paid for them?
Eligible Dependent Care expenses are reimbursable when they are actually incurred. Expenses are treated as incurred when the employee has been provided with the service, not when they are billed or pay for the service.
Example: On March 1 you pay for the entire month dependent daycare expenses. You can be reimbursed once the services have been provided, not on March 1 when you paid for it. You can submit claims after each week, every two weeks, or wait until the end of the month.
A Tax Identification Number (TIN) is required on the claim form
If the employee’s babysitter does not have a TIN, the employee must submit his/her nine-digit Social Security Number with your claim form. If the employees provider does not have a Social Security Number, the employee will be required to submit a letter indicating that they have attempted to obtain a SSN or TIN from the provider and they are unable to do so, as the provider does not have one or will not provide it to the employee.
Are there limitations that apply to Dependent Care Assistance FSA Plans on an aggregate basis?
The maximum amount an employee may elect to a Dependent Care Assistance FSA Plan is set at $5,000 by law. This $5,000 limitation is the maximum pre-tax benefit for all dependent care programs, available to employees, including programs other than FSAs. As a result, if an employee is receiving a childcare subsidy and the combined benefit to that employee exceeds the $5,000 limit, both the employee and the Agency will be responsible for tax on any aggregate amount that exceeds $5,000 ($2,500 if married but filing separately).
Amounts exceeding the applicable limit could also happen if both spouses work for employers offering an FSA program and both choose a Dependent Care FSA, which combined, exceeds the applicable limit of $5,000 ($2,500 if married and filing separately).
Dependent Care Assistance Plan FSA versus Child Care Tax Credits?
Depending upon your employees particular tax situation, it may be more advantageous to your employees to use the tax credit rather than a DCAP FSA exclusion. The amount of the DCAP FSA exclusion is limited to $5,000 per tax year ($2,500 for married individuals filing separate returns). If the applicable limitation is exceeded, the excess is included in income and taxable. There is a Dependent Care Tax Credit Worksheet that can help you determine which option is best for you.
You may also wish to consult a tax professional if you are unsure of which option is more beneficial for your particular tax situation.
Who Can Participate in a Dependent Care Assistance FSA Plan?
In general, participation in a DCAP may be extended to any common-law employee of the employer.*
Self-employed individuals can also participate in a DCAP, though not through a cafeteria plan.** Thus, sole proprietors, partners, more-than-2% shareholders in a Subchapter S corporation, and other self-employed persons can participate in a DCAP that is funded outside of a cafeteria plan. For example, an employer could have a DCAP that provides benefits to these individuals and is financed entirely by the employer outside of a cafeteria plan (i.e., with no salary reductions or other contributions from the individuals). A DCAP that covers such individuals might be a “stand-alone” plan that is separate from the DCAP under the employer’s cafeteria plan. Another option might be to use a single Dependent Care Assistance FSA Plan for both the employees who are eligible for the cafeteria plan (i.e., those who make salary reductions) and those self-employed individuals who are not eligible for the cafeteria plan. The DCAP document would need to differentiate the funding mechanisms for the two groups.
Note that the employee must support the tax-free nature of dependent care assistance benefits by completing Form 2441, which is attached to his or her Form 1040 or Form 1040A. Form 2441 requires the employee to calculate the maximum tax-free amount, which effectively requires employees to ensure that no double federal tax benefits are being taken for the same expense.
* See Code § 129(d)(1).
** For purposes of the Dependent Care Assistance FSA Plan rules, the term “employee” includes a self-employed person within the meaning of Code § 401(c)(1), which relates to self-employed individuals. See Code § 129(e)(3). But for cafeteria plan purposes, these individuals are not considered to be employees (see Section IX) and may not participate in a DCAP with salary reduction dollars. See Code § 125(d)(1) and Prop. Treas. Reg. § 1.125-1(g)(2). Note that expenses relating to self-employment qualify as employment-related expenses under the DCAP rules. Treas. Reg. § 1.21-1(c)(1).