As fall approaches, parents are making decisions about what care their children will need during the new school year. Child care can be a significant expense for many families. In fact, according to a recent Care.com survey, 59% of families estimated they’ll spend more than $10,000 on child care in 2021.
With open enrollment just around the corner, an employer-sponsored benefit parents may want to consider to offset child care expenses is a Dependent Care Assistance Program (DCAP).
What is a DCAP?
A Dependent Care Assistance Program — also known as a dependent care flexible spending account — is a plan that lets employees set aside a portion of their paycheck to pay for day care and related expenses that are necessary in order for them to be able to work. Importantly, a DCAP can be used to cover care for dependents up to age 13.*
Some helpful things to know
There are some uses for DCAPs that many employees may not be aware of, including who the funds can cover child care for, and how to maximize DCAP dollars.
Using a letter of medical necessity for children age 13 and up
A DCAP can also be used for children age 13 and up who are unable to care for themselves due to a physical or mental disability. Parents must provide a letter of medical necessity and meet IRS requirements.
Avoiding income tax on your earnings
Employees can deposit money into their DCAP tax-free, allowing them to save money without incurring income tax on those earnings.
Here is another big benefit to having a DCAP — the number of expenses that are covered! Examples of eligible child care expenses that can be reimbursed include:
- Licensed day care facilities
- Preschool programs
- Before and after school care
- In-home child care and dependent care services
- Summer day camps
- Babysitting if the care allows a parent to work
Note: If an employee uses a relative or friend for child care, these expenses are reimbursable as long as the caregiver isn't the parent of the child, or the employee’s spouse, a dependent of the employee, or under the age of 19.
Examples of expenses that are not eligible under a DCAP include:
- Private tutors
- Lunches and food items
- Education programs
- Overnight camp
- Tuition for kindergarten and higher grades
- Activity fees
- Summer school
- Music and dance lessons
- Swimming lessons
- Virtual day care and virtual day camps
The Further Learning Center offers a variety of DCAP resources to explore. Further’s Member Services team is also available to answer employee questions at 800-859-2144 or via email at [email protected].
*During 2021, the IRS has temporarily allowed plans to increase the maximum age limit for DCAP up to a dependent’s 14th birthday.