TECHNICAL GLOSSARY

What Is a Dependent Care Assistance Program (DCAP)?

DCAP - dependent-care assistance plans—are an employer-sponsoring benefit designed to allow employees to use pre-tax (before taxes are withdrawn from their paychecks) money to pay for certain dependency-related expenses. Because the IRS provides guidelines as to which types of expenses qualify for payment, DCAP plans can provide a way for employees to decrease their overall taxable income and assist working families with the costs of providing care for their dependents.
Through a DCAP, employees may elect (or choose) to withhold a part of their salary on a pre-tax basis. These pre-tax funds may then be used for paying or reimbursing eligible child care or adult dependent care costs. These expenses are reported to the employee through IRS (the Internal Revenue Service) standards via the employee’s Form W-2.
Qualified expenses include any expense incurred to provide care to an employee’s eligible dependent for purposes of the employee’s ability to either work or seek employment.

Who Qualifies as a Dependent for DCAP Purposes?

In order for your eligible dependents to qualify for the DCAP, they must meet IRS criteria. Generally, your qualifying dependents consist of:

• Children under age 13, whom you have claimed as dependents
• A spouse who is physically or mentally incapable of caring for themselves
• Other dependent adults who have lived with you for over half the year and cannot care for themselves.

Family relationships would include, but are not limited to, your child or parent, so this would dictate whether they meet the IRS criteria for dependency and the eligibility to be cared for by you with DCAP funds-not just how many people are in your family.

DCAP Contribution Limits and Tax Rules

Annually, the IRS sets a limit on the maximum amount of dependent care assistance (DCAP) you can exclude from your taxable income. If you're a typical taxpayer, the maximum amount you can contribute tax-free to a DCAP per household is $5,000. If you are married and file separately, you may only contribute $2,500 as a DCAP tax-free contribution per spouse to DCAPs. Any DCAP contributions over those limit amounts are considered taxable and must be reported as income accordingly. Employers typically allow for contributions to DCAO through employee salary reductions (pre-tax) and/or employer contributions, depending on the plan.
As a rule, the total of your DCAP contributions cannot exceed the earned income of your lower-earning spouse. Earnings from employment (e.g., wages/salaries/tips) and from self-employment/net earnings from self-employment are considered "earnings". This provision of the IRS ensures that DCAP funds are used for employment-related purposes, and thus are compliant with IRS standards.