Dependent Care Assistance
Chapter 54
Employee Benefit & Retirement Planning
Plan
What is it?
A dependent care assistance plan
– Reimburses employees for day care and other dependent
care expenses
OR
– Provides an actual day care center or similar arrangement
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Dependent Care Assistance
Chapter 54
Employee Benefit & Retirement Planning
Plan
When is it indicated?
• Employer wants to attract and retain employees who
must find care for dependents during work hours
• To provide attractive tax benefit to all employees with
dependent care expenses
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Dependent Care Assistance
Chapter 54
Employee Benefit & Retirement Planning
Plan
Advantages
1. Helpful in recruiting and retaining low-paid
employees who have dependent care needs
2. Provides tax advantages to employer; dependent
care assistance is tax-free to employees
3. Plan can be funded in part or total through FSA
salary reductions
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Dependent Care Assistance
Chapter 54
Employee Benefit & Retirement Planning
Plan
Disadvantages
1. Fully-subsidized dependent care is costly; partially
subsidized program may not attract and keep
employees
2. Nonparticipating employees may see dependent
care as discriminatory
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Dependent Care Assistance
Chapter 54
Employee Benefit & Retirement Planning
Plan
Design Features
1. In-kind
–
–
Day care and after school care on business premises
Contract with nearby center
2. Provide benefit through full or partial reimbursement
of qualifying employee expenses for dependent care
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Dependent Care Assistance
Chapter 54
Employee Benefit & Retirement Planning
Plan
Tax Implications
1. Plan costs tax deductible to employer
2. Benefits tax-free to participating employees
3. If plan is discriminatory, plan benefits become
taxable to highly compensated employees
4. Dependent care assistance only available for
– Dependent child under age 13
– Spouse or dependent physically or mentally unable to care
for self
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Dependent Care Assistance
Chapter 54
Employee Benefit & Retirement Planning
Plan
Tax Implications
5. Limit on dollar amount of benefits
6. Qualifying expenses for care alone, not education,
above kindergarten level
7. Dependent care assistance plan must be in writing
8. Taxpayer must report name, address, and tax
identification number of care provider
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Dependent Care Assistance
Chapter 54
Employee Benefit & Retirement Planning
Plan
ERISA and Other Requirements
Welfare benefit plan under ERISA
–
–
–
–
Written plan document
Summary plan description
Designated plan administrator
Formal claims procedure
Employer must give statement of prior year expenses to
employees using plan
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Dependent Care Assistance
Chapter 54
Employee Benefit & Retirement Planning
Plan
Alternatives
Extra compensation
Bonuses
How to Install a Plan
Develop:
– Written plan
– Summary plan description
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