Flexible Spending Plans
Flexible Spending Plans for Dependent Care
(also called Dependent Care Assistance Plans)
Dependent Care Assistance Plans (DCAPs) are a type of flexible spending account (FSA) that is specifically for dependent care-related costs. FSAs are a broader category, within which all healthcare costs typically fall; DCAPs are a type of FSA which is focused solely on dependent care expenses to help employees manage child care or elder care costs.
Under current federal tax law, employers can set up DCAPs, which are flexible spending accounts. If employers choose to offer such plans, employees can set-aside up to $5,000 in pretax salary for dependent care expenses. Using pre-tax dollars means a tax savings to employees (potentially 20-40% of child care expenses depending upon the family’s tax bracket and expenses incurred for child care) as well as a tax savings for employers (funds set aside through a flexible spending account reduce employer payroll – for example, these funds aren’t subject to FICA or FUTA taxes).
For many employees with young children, they may already be paying for child care, so the option for a flexible spending account reimburses parents at a tax savings for money that would be spent anyway.
How do flexible spending plans work?
1. Employer Sets Up Plan. An employer establishes a written plan, as required by the IRS, and distributes a summary of the plan to all employees, which is required by the U.S. Department of Labor.
2. Estimate and Deduct. Employees estimate how much they think they will spend on child care for the year. They can then choose to have up to $5,000 of their salary per year set aside tax-free into a flexible spending account through regular paycheck deductions.
3. Get Reimbursed. As child care expenses are incurred, employees can submit for reimbursement from their flexible spending account (FSA). FSAs are capped at $5,000. Expenses related to dependent children under age 13 or related to dependents who are mentally or physically incapable of caring for themselves (and who the employee claims as a dependent) are eligible for reimbursement through FSAs.
4. Calculate Savings. Here’s a calculator to help employees figure out tax savings by utilizing DCAP benefits. In general, there are cost savings to be realized through the tax code for employees who are able to participate in an employer-sponsored DCAP. Everyone’s family and tax situations are different; a tax professional can help answer your specific questions and concerns.