The 2020 pandemic has disrupted everyone's life.
And working parents of young children have been among the most challenged. School, daycare and workplace closures have required such employees to supervise their children’s education while working from home. With most of us believing our worlds would return to pre-pandemic normal by late summer, no one gave thought to fund balances sitting – and accumulating – in dependent care assistant program (DCAP) accounts.
Now, however, 2020 is coming to a close, COVID-19 is still causing shifts in childcare needs, and with the “use it or lose it” rule governing DCAPs, your client’s employees with unused balances in their DCAP accounts face forfeiting the contributions they made over the past several months – and they may have a lot of questions. We’re here to serve as your resource as you field queries about end-of-year options regarding DCAP.
First, a quick primer on Dependent Care Assistance Programs
The DCAP is an employer-sponsored reimbursement program to which employees make pre-tax payroll contributions. After paying for eligible expenses, account holders can use their DCAP funds to reimburse themselves. Currently, the maximum annual contribution is $5,000. Among eligible expenses:
- Licensed day care facilities
- Preschool programs
- After-school programs
- In-home child and dependent care services
- Babysitters, if the babysitting is to allow the parent to work
- Elder care
- Day camp expenses, if not educational in nature
During the pandemic, many parents have hired relatives or friends to watch their children while they work. This is an eligible expense for DCAP reimbursement as long as the friend or relative isn't a spouse, the parent of the child, a dependent, or a child under the age 19.
Second, what are account holder options for the remainder of 2020?
Because many dependent care account holders didn’t incur the childcare expenses they expected throughout the year, they are now asking your HR Director/Benefits Manager clients how they can avoid losing their 2020 contributions. IRS rules do not allow a roll back of funds that were already deposited into an account. However, if an employee’s dependent care costs have been significantly reduced, there is a short period of time remaining yet this year to adjust election amounts. Unlike medical FSAs, contributions to DCAPs can be changed throughout a plan year. The IRS has deemed the following as qualifying events that allow for changes in contributions:
- Reduced work hours or change in employment status for the account holder or their spouse. A reminder: A workplace closure that forces employees to work from home can be considered a change in employment status. The same holds true for a return to the workplace.
- Substantial change in employer benefits/cost
- Change of cost from the provider or switching providers because of a change in their cost
If a DCAP account holder has funds they need to spend yet this year, they have a few choices:
- They can use their funds to pay a relative to watch their children, so long as that relative is not a tax dependent. (Remember that care providers must claim this income on their taxes.)
- If an account holder’s children are enrolled in distance learning, this might be a good opportunity to hire someone for a few hours a week to keep them safe and focused while the parent works – even if the parent works from home. Keep in mind this must be for childcare; DCAP funds cannot be used for tutoring or teaching.
- They can still take advantage of their account to pay for the eligible expenses listed earlier in this post.