The Internal Revenue Service has provided greater flexibility, due to the pandemic, to employee benefit plans offering dependent care assistance programs (DCAP). A family can use funds in their DCAP to help offset the wages paid to their nanny.
Under the COVID-related Taxpayer Certainty and Disaster Tax Relief Act of 2020, your employer now has additional discretion in 2021 and 2022 to adjust their programs to better meet the unanticipated childcare consequences of the public health emergency.
As a result of COVID-19, you may be more likely to have unused funds in your DCAP at the end of 2020 and 2021.
Generally, under these plans, your employer allows you to set aside a certain amount of pre-tax wages to pay for dependent care expenses like wages paid to a nanny. Amounts you spend are then reimbursed from your designated DCAP.
Your employer now can:
- Provide flexibility for the carryover of unused amounts from the 2020 and 2021 plan years;
- Provide flexibility to extend the permissible period for incurring claims for plan years ending in 2020 and 2021;
- Provide flexibility for a special claims period and carryover rule for dependent care assistance programs when a dependent “ages out” during the COVID-19 public health emergency; and
- Allow certain mid-year election changes for dependent care assistance programs for plan years ending in 2021.
Prior guidance provided flexibility to employers with cafeteria plans through the end of calendar year 2020, during which employers could permit employees to apply unused health FSA amounts and dependent care assistance program amounts to pay for or reimburse medical care or dependent care expenses.
The Taxpayer Certainty and Disaster Tax Relief Act of 2020 provides similar flexibility for these arrangements in 2021 and 2022.
Millions of employees have access to DCAPs, sponsored by their employers under “cafeteria plans.” The decision to adjust these benefit programs is at the discretion of your employer. Check with your human resources department to see if you can take advantage of these new changes.
DCAP amounts properly spent are not subject to federal income tax. Typically, account funds you do not spend within the plan year, subject to limited grace periods or certain carryover amounts, are forfeited.
Your employer now has the option to amend their plans to provide greater flexibility for you to elect and use these programs during the pandemic without risking the forfeiture of the amounts you have set aside.
The IRS has more COVID-19-related information for plan participants, employers, and others who administer plans.
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