What Is a Dependent Care Assistance Program (DCAP)?
A Dependent Care Assistance Plan (DCAP) is offered by employers to assist their workforce with the payment of qualified dependent care expenditures via pre-tax dollars. This plan is governed by Internal Revenue Service (IRS) regulations and provides support for employees who have responsibility for caring for a qualifying dependent, thereby allowing them to continue to work or search for employment.
Through the DCAP, employees can designate a portion of their gross earnings as pre-tax dollars to fund eligible child and/or adult dependent child care costs. An employer's DCAP benefit is reported on the employee's Form W-2 and using these benefits appropriately can lower the taxable base of both the employees and employers.
How a DCAP Works
Employees who participate in the DCAP program authorize payroll withholding to finance an account for dependent care. Contributions to dependent care accounts are not subject to federal income tax and, in most cases, social security and Medicare taxes.
Employees may use funds within their account to reimburse an employee's qualified dependent care expenses as follows;
- Daycare and preschool facilities
- Before-and-after-school care
- Babysitter or nanny services (properly documented)
- Dependent adult daycare for a dependent adult who resides with the employee
Qualified expenses could include dependent daycare costs that are solely for the purposes of permitting the employee (and if married, the employee's spouse) to earn a living or actively search for a job.
Who Qualifies as a Dependent for DCAP Purposes?
According to IRS criteria regarding DCAP eligibility, the IRS has a specific definition of qualifying dependents. A dependent must be:
- A child who is under age 13 and that you can claim as a dependent on your tax return, or
- A spouse or other dependent who cannot care for themselves either physically or mentally, that lives with you for at least half the year
Not all family members automatically meet the qualifying criteria listed above, but your dependents qualification for DCAP will depend upon their age, where they lived with you, as well as whether they meet IRS guidelines regarding their ability to take care of themselves.
DCAP Contribution Limits
The Internal Revenue Service publishes a maximum limit each year regarding how much may be excluded from gross income with respect to a dependent care assistance program (DCAP). The limit is the following:
- Up to $5,000 per year for all households having the same address; or
- If married and filing a separate return, up to $2,500.
Any amount over these limits is taxable in the year of receipt.
Also, Earned income of the employee or of their spouse must exceed total amounts contributed into the DCAP based on the lower of the two earned incomes; this is measured as wages, salaries, tips, and Net Earnings from Self-Employment. In some states, the spousal earned income must equal that of the other spouse.
Depending upon how a DCAP is structured, either employers or employees are allowed to contribute to the DCAP.
DCAP vs. Dependent Care Tax Credit
In general, you cannot use the same expenses to claim both a DCAP and the Child and Dependent Care Tax Credit. However, if you received a DCAP benefit, that would lower your eligible expenses for the Child and Dependent Care Tax Credit, but would not completely eliminate your ability to claim any expenses for that tax credit.
In addition, the option that will be the most beneficial will depend on your level of income, number of dependent children and the total amount of child/dependent care that you are claiming.