Dependent Care Assistance Program Compliance Basics
From ChamberChoice
The cost of childcare is a growing burden on families across the country, but employers can address this cost to some extent by making a Dependent Care Assistance Program (DCAP) available to employees as a benefit funded through pre-tax salary deductions through a cafeteria plan. DCAPs are also sometimes referred to as dependent care flexible spending accounts.
Eligible expenses for reimbursement through a DCAP include any amounts the employee pays for the “care” of dependents. These expenses may include day-care fees and amounts paid to in-home care providers. The DCAP can reimburse these expenses provided that the employee and spouse (as applicable) are gainfully employed – a DCAP may not be used to pay a spouse who provides childcare to his or her own children.
DCAPs funded through pre-tax payroll deductions must follow the requirements in the Internal Revenue Code Section 125 for cafeteria plans. Since they are generally not considered group health plans, they are not subject to HIPAA, ACA, and COBRA. Also, DCAPs that reimburse employees for their dependent care costs are not required to follow ERISA. For example, these benefits do not have to be listed or mentioned in the ERISA Wrap Plan Document, Wrap Summary Plan Description, or reported on the group’s Form 5500. Additionally, an employee participating in a DCAP benefit may also make contributions to a health savings account.
Employers who sponsor DCAPs or who are considering adding one to their existing employee benefit package will need to comply with the nondiscrimination requirements applicable to cafeteria plans and to DCAPs specifically. An employer needs to assure that the benefit is not discriminatory in favor of key employees and/or highly compensated employees. Discrimination generally will not jeopardize the overall tax-favored status of the plan; although egregious violations might cause a plan to be “disqualified”. In most cases, discrimination problems usually cause only the value of plan benefits to become taxable income to the affected key employee or highly compensated employee. There are generally three nondiscrimination requirements the plan must meet. Annual nondiscrimination testing can help to identify and remedy discrimination issues before they result in adverse tax consequences.
This article gives a basic overview of recent regulation as in effect on the date of the article. Please be aware that the determination of the requirements and the application of these rules to each employer may differ due to a number of variables. Nothing in this article should be construed as legal advice.