A dependent care assistance plan (DCAP), also referred to as a dependent care flexible spending account (FSA), is an employee benefit plan that helps employees pay for the care of a qualifying dependent, as defined by Internal Revenue Service (IRS) regulations. The qualifying dependent must live with the employee and must be 12 years old or younger. A person age 13 or older qualifies if that person is physically or mentally incapable of self-care and regularly spends at least eight hours a day in the employee's household. This type of FSA allows an employee to be reimbursed for eligible dependent care expenses so that the employee and his or her spouse may work, look for work or attend school full time.
The employer sets the minimum and maximum an employee contributes, but the IRS limits the amount a DCAP can provide to $5,000 ($2,500 per parent if married and filing separately) tax free. DCAP assistance above $5,000 ($2,500 per parent if married and filing separately) is taxable income. Employees and employers can make contributions into a DCAP depending on the type of plan established.
Unlike health care FSAs, IRS guidelines dictate that DCAP funds are available only as they are accrued, per payroll deduction. Any unclaimed DCAP funds remaining at the end of the benefit plan year are forfeited if not claimed/spent down within the plan year. Funds do not roll over from year to year. Like health care FSAs, DCAP elections are irrevocable, except in the event of certain changes in legal marital status, a change in number of dependents, or a change of employment status of the employee, his or her spouse or dependent.
For detailed information on the types of child care expenses reimbursable under a DCAP, see this related Q&A.
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