DCAP Employer Overview
Another Valuable Benefit That Helps Reduce Taxes And Increase Spendable Income
What is it?
A Dependent Care Flexible Spending Account (FSA) allows your employees to save both FICA (7.65%) and Federal Income Tax (10%-35%) on qualifying dependent care expenses. In Ohio, both State and Municipal taxes are exempt, too
What are qualified dependent care expenses?
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The care for which employee is paying must be for one or more qualifying dependents. |
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Must keep up a home that employee resides in with the qualifying dependent(s). |
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Must have earned income during the year unless the spouse is a full-time student or is unable to care for himself/herself. |
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Dependent care expenses must be incurred so that employee can work or look for work. |
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The payments made for dependent care must be to someone employee or spouse cannot claim as a dependent |
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Care provider must be identified on employee’s tax return when filing federal income tax. |
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When filing income tax, employee’s filing status must be single, head of household, qualifying widow(er) with dependent child, or married filing jointly. Must file a joint return if married or meet the "Joint Return Test" rule described in IRS Publication 503 - "Child and Dependent Care Expenses." |
What dependents are eligible under this plan?
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If dependent is under age 13 and employee can claim as a dependent for income tax purposes. |
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A Spouse who is physically or mentally unable to care for himself/herself. |
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Dependent who is physically or mentally unable to care for himself/herself, and employee claim as an exemption for income tax purposes. |
How does the plan work?
Each pay period, the employer will deduct the amount elected to have withheld from the employee’s paycheck. No FICA or federal income taxes, state or municipal taxes will be deducted from the elected amount. These funds will be held in a disbursement account in the employees name until a claim is made for qualifying expenses.
How much can employee have withheld from the paycheck as a participant?
Pre-tax reimbursements of qualified dependent care expenses cannot exceed a certain amount during the plan year, and the maximum is the lowest of the following:
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Earned income (including self-employment wages) for the plan year; |
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Spouse's earned income for the year; or |
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$5,000 ($2,500 if married and filing separate income tax returns) election amount. |
When does an employee elect to participate?
Enrollment commences each year during the open enrollment period and prior to the plan anniversary date.
What is the advantage for the employer?
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No FICA sharing for the employer |
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A valuable perk for the employee that can be offered at NO ADDITIONAL EXPENSE for the employer |
(As with any tax law, there are rules that may not be attractive.)