What are the requirements for DCAPs?

A dependent care assistance program (DCAP) must be a separate written plan of an employer for the exclusive benefit of its employees. An employer need not fund the DCAP, but the DCAP must meet the following requirements:

• The plan must benefit employees who qualify under a classification which is set up by the employer and found by the IRS not to discriminate in favor of officers, owners, or highly compensated employees, or their dependents.
• Under the terms of the plan, not more than 25 percent of the amounts paid or incurred by the employer during the year may be provided for individuals who are shareholders or owners (or for their spouses or dependents), each of whom owns more than 5 percent of the stock or of the capital or profits interest in the employer.
• The employer must provide reasonable notification of the availability and terms of the plan to eligible employees.
• The plan must also furnish to each employee each year, on or before January 31, a written statement showing the amounts paid or expenses incurred by the employer in providing dependent care assistance to such employee during the previous calendar year.

Excludable employees. Employees may be excluded from coverage under the plan if they are members of a unit covered by a collective bargaining agreement and there is evidence that dependent care benefits were the subject of good-faith bargaining between the unit's employee representatives and the employer (or group of employers).

An employer's dependent care plan is not considered discriminatory if the written plan offers the services equitably, i.e., on a first-come, first-served basis or other impartial manner. In addition, the benefit must be provided to all eligible employees without distinction as to sex, religion, employment status, race or marital status.

Dependent care assistance payments provided under an employer's written nondiscriminatory plan are generally excludable from an employee's gross income.

Reprinted with permission. © CCH