How is DCAP discrimination testing done?

Amounts paid by an employer for an employee in a dependent care assistance program are excluded from the employee's gross income if the program does not discriminate in favor of highly compensated employees. The contributions or benefits provided may not discriminate in favor of these employees.

The exclusion is not available if more than 25 percent of the amounts paid or incurred by an employer for dependent care assistance are provided for five-percent owners or their spouses or dependents.

Discrimination testing-55-percent test. The dependent care assistance exclusion applies only if the average benefits provided to employees who are not highly compensated are at least 55 percent of those made available to highly compensated employees. If a dependent care program fails the 55-percent benefits test, highly compensated employees must include the value of benefits received in income. The 55-percent test may be applied on a separate-line-of-business basis.

Employees excluded. These employees can be excluded from consideration under the 55-percent test:

1. employees who have not reached age 21 and completed one year of service;

2. employees who are covered by a collective bargaining agreement-only if dependent care benefits were the subject of good-faith bargaining; and

3. employees earning less than $25,000-only if dependent care benefits are provided under a salary reduction arrangement.