The Dependent Care Assistance Program is also a flexible spending arrangement (FSA). The funds set aside in this account can provide additional tax savings for expenses incurred for the daycare of a child (under the age of 13) or the care of a tax dependent that is incapable of self-care. The expenses must enable the employee and spouse to be gainfully employed. Those amounts paid for food, lodging, clothing, and education generally won’t qualify for reimbursement under this plan.
Elections, Contributions and Reimbursements
When making a DCAP election, an employee will estimate the amount of DCAP expense they will incur during the Plan year. The annual election amount will be divided uniformly by the employees pay schedule on a pre-tax basis (tax free), then deposited into the individuals DCAP account. Once these funds have been deposited, the individual can start using the money for any qualified DCAP expenses incurred during the Plan year. These funds need to be used by the end of the run-out period, since DCAP funds don’t rollover year-to-year. Any unused funds remaining in the account will be forfeited.
Reimbursement is made simple by our interactive forms that can be completed online and the convenience of our AxisPlus® debit card.
Statutory Limits
DCAPs have statutory limits on the amount that can be reimbursed during a calendar year. Currently, the maximum amount for family coverage is $5,000 or $2,500 if married filing separately or the employee’s or spouse’s earned income, if lower.
Earned Income Credit (EIC)
Certain low income individuals may qualify for a refundable tax credit, referred to as the Earned Income Credit (EIC). Participation in DCAP could have an impact on this refundable tax credit because DCAP salary reductions are excluded from earned income. This usually will increase the EIC; however, employee’s that have very low income, DCAP could decrease the EIC.
Reporting
While the amount reimbursed under this Plan is not taxable to the employee, the employer is required to report the pre-tax amount on the employee’s W-2 form; in turn, the employee should file a Form 2441 with their 1040 tax return to justify that the amounts reported on the W-2 are non-taxable (See below for downloadable form and instructions). Any expenses reimbursed through the DCAP cannot be claimed under the Dependent Care Tax Credit and vice versa. Most generally DCAP ends up saving the employee more, but there has been situations where this isn’t the case. AxisPlus Benefits™ can provide you with a simple worksheet to show you if DCAP will save you more than filing these expenses on your tax return.
