FSA – Dependent Care
DEPENDENT CARE ASSISTANCE PROGRAM
The dependent care assistance program (DCAP) which is a flexible spending account (FSA) is a voluntary way for employees to pay for work-related child or dependent care expenses for children under age 13 and/or older dependent who are incapable of self-care. Employees save between 25% and 50%, depending on their tax.
HOW A FLEXIBLE SPENDING ACCOUNT WORKS
Prior to the plan year, employees elect how much they would like to have taken out of their paycheck on a pre-tax basis. “Pre-tax” means before state, federal, Social Security, and Medicare taxes are applied.
The annual limit for married employees filing jointly or single heads of household is $5,000 per plan year. For employees that are married and filing separately, the annual limit is $2,500 per plan year. The $5,000 limit is a per-household limit, so employees must coordinate their DCAP election with their spouse. Contributions to the DCAP benefit are deducted from pay evenly over the plan year, based on the employee’s election. As dependent care expenses are incurred, employees submit them to Alerus for reimbursement.
Alerus is required to “substantiate” each claim (matching receipts and claim forms to ensure all information has been submitted) according to IRS regulations. Alerus reimburses employees for qualified DCAP expenses by check or direct deposit.
Reimbursement for dependent care expenses cannot exceed the amount that has been withheld from an employee’s pay. If the amount of claims submitted exceeds the balance in the DCAP, the available balance will be paid and the remaining claim balance will be paid as future DCAP contributions occur.
OTHER IMPORTANT FACTS
- If an employee doesn’t spend the money they’ve elected to take out of their check, it is forfeited at the end of the plan year.
- New DCAP benefit elections are required every plan year.
- Once the plan year begins, employees cannot change their elections unless they experience a qualified change in status.
- New employees beginning coverage after the plan year begins can be reimbursed for expenses incurred after their coverage starts.
- The $5,000 annual DCAP limit is per household – coordinate with spouse as needed.
- IRS Publication 503 is available at irs.gov and explains qualified dependent care expenses; a tax credit is also available for dependent care. Employees should carefully consider which works better for them — the tax credit or the DCAP.
EMPLOYMENT-RELATED DEPENDENT CARE EXPENSES
Expenses reimbursed by a DCAP must be expenses incurred to allow the participant and, if applicable, the spouse to be gainfully employed. This means the participant must only claim expenses incurred while they are actually at work, excluding expenses which might be incurred while the participant is on a leave of absence, on vacation or is out of work ill. However, temporary absences from work for matters such as illness or vacation can be disregarded if the participant is required to pay for dependent care expenses on a weekly or longer basis. Dependent care expenses incurred during a typical leave of absence (paid or unpaid) are non-reimbursable.
The following employment-related expenses are eligible for reimbursement by a DCAP:
After-school care Nanny
Before-school care Preschool/nursery school
Day camp center Registration fee (to obtain care)
Dependent care Sick-child facility
Elder care
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