Dependent Care Assistance Programs
Employer Programs
Dependent care assistance programs are those that employers establish by a written plan to provide dependent care assistance for the exclusive benefit of employees. The payments received under the plan and used by employees to pay dependent care expenses are excludable from employees’ income up to the lower of:
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The employee’s earned income (for married employees, this is the earned income of the lower paid spouse), or
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$5,000 ($2,500 for married separate)
Dependent care assistance which exceeds the limits must be included in an employee’s income in the year the dependent care is provided even though it is not paid to the employee until later.
Other Rules
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Compute the earned income limitation of a spouse who is incapacitated or a full-time student in the same manner as is done under the childcare credit rules.
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When dependent care is provided in-kind on the employer’s premises at a facility maintained by the employer, employees using the facility exclude from income the value of the services provided.
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There is no dependent care assistance exclusion where the care provider is the employee’s dependent and/or child under age 19.
Self-Employed Individuals as “Employees” Eligible for the Dependent Care Assistance Exclusion
An “employee,” for purposes of the dependent care assistance exclusion, includes a self-employed individual who can be covered under a self-employed retirement plan under Code Sec. 401(c)(1).
An advantage of a self-employed individual receiving dependent care assistance as a participant in a dependent care assistance program is that the taxpayer would be able to deduct the cost of providing this benefit as a business expense. Also, a self-employed individual who provides dependent care facilities under a dependent care assistance program, would be able to participate without disqualifying the program.
However, the self-employed individual participating in a dependent care assistance program, will be taken into account in applying the non-discrimination tests.
Excess Plan Contributions
Where the amounts a taxpayer contributes to an employer-provided dependent care assistance plan exceeds the qualifying expenses, the excess is determined by completing Part III of Form 2241 and reported on line 1e of the 1040, 1040-SR or 1040-NR, whichever applies.
Special Rule for 2021 and 2022
Dependent care assistance program benefits that would have been excluded from income if used during the tax year ending in 2020 or 2021 remain eligible for exclusion from the participant’s gross income and are not wages of the employee for the taxable years ending in 2021 and 2022. And these benefits will not be taken into account for the limitation on other dependent care benefits available for the tax years ending in 2021 and 2022. (Notice 2021-26)