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Why every employer should have a Section 129 DCAP FSA plan in 2020

Dependent Care FSA Plan Documents

In a tightening labor market, a Section 129 DCAP FSA is a powerful and popular employee benefit every employer should have in 2020 and beyond. Pre-tax salary deductions mean more tax savings for employers and employees, too.

Every employer should provide a Section 129 DCAP FSA option to employees -- Core DCAP plan document package $129

 

Managing the cost of child care

For most families, paying for child care so that both parents can work is an escalating burden. The cost for daycare can be higher than housing or a year of in-state college tuition. Here are some examples of averages by state:

Cost of Child Care
State Housing College tuition 4-year-old Infant
Colorado $13,829 $9,540 $12,390 $15,325
Indiana $9,613 $9,038 $9,557 $12,612
Minnesota $11,137 $11,226 $12,252 $16,087
Vermont $11,616 $16, 103 $11,717 $12,812
Annual expense data from Economic Policy Institute, The Cost of Childcare, July 2019.

DCAP FSA vs. tax credits

Employers providing access to a DCAP FSA show interest in employees’ well-being and that of their family, with a pre-tax benefit better than any other tax savings available, including the federal dependent care tax credit.

The Child and Dependent Care Credit provides as much as $1,050 per child for up to two children, or 35% of up to $3,000. Problem is, the more parents earn, the smaller the credit, the credit only comes at the end of the year, and it is not a refundable tax credit.

By comparison, an employer-sponsored Section 129 DCAP FSA benefit allows a tax benefit on up to $5,000 in dependent care expenses and the savings increases as parents generate higher incomes and are taxed at higher rates. Parents also save the 7.65% Social Security FICA tax on that $5,000. There is no waiting for the benefit at the end of the year and, it’s even better than a refundable credit because it’s money that stays in the parents’ hands in the first place.

Best of all, the employer is spared as much as 10% in payroll taxes on employees’ pre-tax DCAP FSA deposits.

Getting started

Employers thinking about adding a Section 129 DCAP FSA benefit can do so simply by establishing a written plan document (an IRS requirement) and distributing a benefit summary plan description to every employee (as required by the Department of Labor).

Core Documents can provides employers with everything necessary to establish a Section 129 Dependent Care Assistance FSA including:

  • The DCAP FSA plan document;
  • Summary Plan Description;
  • Election and Claim Forms; and,
  • A complete DIY Administration Guide.

 

This all-inclusive plan document package is available for only $179 (deluxe binder version; a PDF-only version is also available at $129), an amount easily recouped through employer tax savings with as few as one employee participating in the plan.

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DCAP FSA FAQs


How does a DCAP FSA work?

A Section 129 DCAP FSA 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.

Employees set aside up to $5,000 annually ($2,500 per spouse when married and filing separately) in pre-tax salary deductions to pay for dependent care necessary for the employee to be able to work or attend school full-time.

These pre-tax funds are held in the employer’s general account until needed to reimburse the employee for dependent care expenses paid throughout the year.

The result is employee tax savings of up to $2,000 annually (with employer tax savings of 8% to 10% in FICA and other payroll taxes).

Who may participate in a DCAP FSA?

Employees meeting these criteria may participate in an employer-sponsored DCAP FSA:

  • The employee must have incurred the expenses in order for them and their spouse to work or look for work (unless the spouse was either a full-time student or physically or mentally incapable of self-care).
  • Their filing status must be single, head of household, qualifying widow(er) with a dependent child, married filing jointly, or married filing separately.
  • The employee (and, if married, their spouse) must maintain a home that you live in with the qualifying child or dependent.

Owners and self-employed

Participation in a Section 129 DCAP FSA 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. For more on this, see: Can an Employer/Owner Participate in Section 129 DCAP FSA Plans?

Who is an eligible dependent?

Eligible expenses include dependent care that is necessary in order for you and your spouse to work. This includes care for:

  • A dependent of the enrolled employee who is under age 13; or
  • The spouse or dependent of the enrolled employee who is mentally or physically incapable of caring for himself or herself, and who the employee claims as a dependent on his or her federal income tax return.
  • A legally dependent parent (ref. IRS Publication 503 Child and Dependent Care Expenses, Who Is a Qualifying Person, definition 3).

What types of care are covered?

The type of eligible dependent care providers is pretty broad, including:

  • Daycare center
  • Private home daycare provider
  • In-home provider
  • Family member*
  • Before- and after-school care
  • Day camp

 

*Payments made to someone who is also your dependent, including your child under age 19, are not eligible for reimbursement.

Private school tuition

The cost of private school tuition is not eligible for reimbursement through a DCAP FSA.

Is the provider’s tax identification number required?

Yes.

When a provider does not have or refuses to give a tax identification number (TIN or Social Security number) to the employee, the employee must submit an affidavit attesting to their attempt to get the number from the provider and their inability or refusal to give it to the employee.

What is the maximum annual benefit?

The law allows employees to set aside pre-tax salary deductions of up to $5,000 annually for married couples filing jointly (or filing as single head of household) or up to $2,500.00 if the employee is married filing separately.

When both spouses’ employers provide a DCAP FSA, the parents must be sure their combined election to the plans does not exceed the $5,000 aggregate annual limit for a couple filing jointly.

Does an employer have to pre-fund a Section 129 DCAP FSA?

No.

Unlike Health FSAs, DCAP models are funded directly by the employee throughout the plan year with reimbursements made only if employee dollars are in the account to cover the expense. If the employee submits a claim for $200 but the account balance is currently $100, the employee will be reimbursed with the available $100 and may re-submit the remaining $100 expense when the account is replenished by their periodic pre-tax salary deductions.

When can an employee submit a claim for reimbursement?

Expenses can only be reimbursed via the DCAP when they have been provided with the service, not when they are billed or pay for the service.

That means an employee paying dependent care expenses in advance cannot submit a claim to the FSA until the period covered by that payment has passed.

Employees paying the care provider in arrears (after service is rendered) may request DCAP reimbursement immediately.

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$179 one-time fee in PDF email + Deluxe Binder via USPS

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The Trusted Source of Affordable Benefit Plan Documents for over 20 Years.

Core Documents is the country’s leading provider of cost-effective, tax-saving benefit plan documents for Section 125 Cafeteria plans and Health Reimbursement Arrangements. The Trusted Source since 1997, thousands of satisfied agents and employer groups nationwide rely upon Core Documents for free plan design consulting services, plan document updates, ERISA Wrap SPDs, and administration services.


PDF Brochure: Core Section 129 DCAP FSA Plan Document Forms

Core Section 129 Dependent Care Assistance FSA Plan Document Brochure


Core Documents also offers state-of-the-art Online Administration with a debit-card for every employee: Optional Administration Services Available

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Also see: Why Amend and Restate Section 125 Cafeteria Plan Documents? IRS Rulings since 1999 on one page.


Download the Core Documents Section 125 Cafeteria Plan Employer Guide HERE

Core Documents Section 125 Cafeteria Plan Employer Guide