Dependent care assistance program (DCAP)

The usual DCAP is a dependent care flexible spending account (FSA). Employees fund it with pre-tax pay under a section 125 cafeteria plan, the plan that lets them take benefits in place of taxable pay. A plan can also provide care on site or pay a provider directly. The limit covers all of these together.

Section 129 requires a separate written plan for the exclusive benefit of employees. It counts self-employed people as employees, so a sole proprietor is their own employer and a partnership employs its partners. The plan may not favor highly compensated employees, who are generally 5% owners and staff paid above a threshold the IRS sets each year. Together, owners of more than 5% and their spouses and dependents may receive no more than 25% of a year’s benefits. If a written plan fails these rules, employees who are not highly compensated keep their exclusion.

The employer must give eligible employees reasonable notice of the plan. By January 31, it must also give each employee a written statement of the prior year’s benefits. It reports all DCAP benefits in box 10 of Form W-2. Any amount over the limit is also taxable wages, reported in boxes 1, 3 and 5.

The employee figures the exclusion in Part III of Form 2441. Part I lists each care provider’s name, address and taxpayer identification number, with limited exceptions. An amount excluded under the plan cannot also be claimed as a credit or deduction, such as the child and dependent care credit.