What Dependent Care Expenses are Covered Under a DCAP?

Jul 26, 2023 | GTM Blog, Tax & Wage Laws

A DCAP is an employer-sponsored program that helps you with the cost of dependent care expenses. Here are the costs that are eligible and ineligible for reimbursement under these types of plans.

A dependent care assistance program (DCAP) is an employer-sponsored benefit plan that allows you to pay for certain dependent care expenses on a tax-free basis, up to a specified limit. DCAPs are also commonly referred to as dependent care flexible spending accounts or dependent care FSAs. Common eligible DCAP expenses include nanny and daycare costs incurred while you and your spouse are working.

What is a DCAP?

A DCAP is an employer-sponsored program that helps you with the cost of dependent care expenses. It establishes an account from which you may seek reimbursement for eligible dependent care expenses. In most cases, you will fund your DCAP account with pre-tax dollars through payroll deductions.

A DCAP may be offered within a cafeteria plan or as a separate plan. A cafeteria plan is an employee benefit plan that allows you to choose from a variety of pre-tax benefits. When a DCAP is offered within a cafeteria plan, it is subject to the same rules that govern cafeteria plans.

What dependent care expenses are eligible for reimbursement?

A dependent care expense is eligible for reimbursement from a DCAP if it is an employment-related expense. An employment-related expense must:

Be primarily for the care of a qualifying individual or for household services attributable in part to the qualifying individual’s care; and
Enable you to be gainfully employed.

Expenses may only be reimbursed after the dependent care services have been performed. For example, if a dependent care provider requires payment at the beginning of the week, you may not seek reimbursement until the end of the week.

What household services are eligible for reimbursement?

Reimbursable household services are ordinary and usual services necessary to the maintenance of the household that are performed in and about your home and attributable to the care of the qualifying individual. Services provided by chauffeurs, bartenders, or gardeners are not eligible for reimbursement from a DCAP.

What expenses for the care of a qualifying individual are eligible for reimbursement?

Expenses for the care of a qualifying individual are reimbursable where the primary function is to ensure the individual’s well-being and protection. Expenses for food, lodging, clothing, or education are not eligible unless these goods and services are incidental to and inseparably part of the care.

IRS regulations include an example where a preschool childcare service includes meals for the students, and the cost of meals is not separated from the cost of child care. In this example, the cost of meals is considered incidental to and inseparably part of the care. Therefore, you may seek reimbursement for the full cost of the preschool program without allocating any portion of the expense to meals.

If a portion of an expense is for the care of the qualifying individual and a separate portion is for another purpose, an allocation can be made to allow the employee to be reimbursed for the portion of that expense that is attributable to caring for the qualifying individual.

However, an allocation is not necessary if the portion of the expense for the other purpose is minimal or insignificant.

IRS regulations provide the following guidance regarding specific expenses that are eligible for reimbursement under a DCAP and those that are not eligible:

Eligible dependent care expenses

Expenses for a nursery school, preschool, or similar program below the level of kindergarten are eligible.
Expenses for before- or after-school care of a child in kindergarten or a higher grade are eligible.
Day camp expenses, including specialty camps such as sports or computer, are eligible.
Expenses for transportation provided by the dependent care provider to or from the place of care are eligible. The cost of transportation provided by anyone else is not eligible.
Employment taxes paid to a caregiver are eligible.
Expenses related to providing room and board to a caregiver may be eligible.
Indirect expenses such as application fees, agency fees, or deposits paid to obtain dependent care services are eligible.

Ineligible dependent care expenses

Expenses for kindergarten or higher grade levels are not eligible.
Expenses for overnight camps are not eligible.
Payments to either your spouse or to a parent of your child who is not your spouse are not eligible.

Learn more about eligible dependent care expenses.

Who is a qualifying individual?

A qualifying individual includes:

Your dependent who is under the age of 13; or
Your dependent or spouse who is physically or mentally incapable of self-care and who has the same principal place of abode as you for more than half of the taxable year.

Individuals are physically or mentally incapable of self-care if, as a result of a physical or mental disability, they are incapable of caring for their own hygiene or nutritional needs, or require full-time attention of another person for their own safety or the safety of others. The individual’s inability to engage in any substantial gainful activity or perform normal household chores or care for minor children does not in itself make the individual physically or mentally incapable of self-care.

Whether someone is a qualifying individual must be calculated on a daily basis. For example, upon a dependent’s 13th birthday, the employee may no longer seek reimbursement for dependent care expenses incurred after his or her dependent’s birthday. You should take into consideration the daily calculation requirement when making their annual elections.

What constitutes gainful employment?

Gainful employment may consist of service within or outside your home, including self-employment, and time spent actively seeking gainful employment. Time spent actively seeking gainful employment includes time spent as a full-time student in an educational organization. Where the purpose of the expense is to enable you and your spouse to be gainfully employed depends upon the facts and circumstances of the particular case. Whether an expense was related to gainful employment is calculated on a daily basis.

If you are married, your spouse must be employed (including self-employed), be actively seeking gainful employment, or be a full-time student in an educational organization during the time that you seek reimbursement for dependent care expenses.

IRS regulations provide the following guidance related to employment-related expenses that enable the taxpayer to be gainfully employed:

Working as a volunteer or for nominal consideration is not gainful employment.
Where dependent care expenses are paid on a weekly, monthly, or annual basis, you are not required to allocate expenses incurred during short, temporary absences from work, such as for minor illness or vacation.
If you work part-time, you may only seek reimbursement for dependent care expenses incurred on the day on which you work. If you work at least one hour, dependent care expenses for that day are eligible.
If a child care center requires payment for periods of no less than one week, but you, as a part-time employee, only work four days each week, you may seek reimbursement for daycare expenses equal to the weekly rate.
Enrollment in night school constitutes full-time enrollment in an educational organization.

Is there a limit on how much money may be contributed to a DCAP?

Yes. A married employee who files a joint tax return or an unmarried employee can place up to $5,000 per calendar year in a DCAP. A married employee who files a separate tax return may only place up to $2,500 per
calendar year in a DCAP.

Additionally, you may also be eligible to deduct eligible dependent care expenses on your tax return, provided those expenses were not reimbursed through a DCAP.

GTM can help

A nanny’s wages and the employment taxes you pay are eligible dependent care expenses. If you’re hiring in-home childcare, GTM can manage your employment responsibilities to alleviate the hassles and worries of being a household employer. We can pay your nanny with direct deposit to make payday easy as well as take care of all paycheck deductions and employment taxes. GTM will file your taxes on your behalf each quarter and can even provide year-end tax forms to make filing your return as smooth as possible. To learn more or to sign up, call (800) 929-9213.