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Simple English definitions for legal terms
dependent care plan
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A quick definition of dependent care plan:
A dependent care plan is a type of savings account that helps people with dependents, like children or disabled family members, reduce their taxable income. People can set up the account with their employer and have money withheld from their salary to go into the account. The account can only be used for certain expenses, like medical or sitter costs, for dependents under the age of 13 or those with a qualified disability. After paying for eligible expenses, people can apply for reimbursement from the account. The limit for how much can be withheld each year without incurring taxes is $5,000 in 2022.
A more thorough explanation:
A Dependent Care Plan, also known as a Dependent Care Assistance Plan (DCAP) or a Dependent Care Flexible Spending Account (DPFSA), is a type of savings account that helps individuals with dependents reduce their taxable income. This plan allows a person to set aside money from their salary to pay for eligible dependent care expenses, such as child care or care for a disabled dependent.
For example, if a person has a child under the age of 13 and pays for daycare, they can set up a DCAP with their employer. They can then have money withheld from their salary to go into the account, which is not taxed. After paying for daycare, they can submit a claim to the DCAP for reimbursement of eligible expenses.
It's important to note that the Internal Revenue Service (IRS) sets limits on how much can be withheld each year without incurring taxes. In 2022, the limit is $5,000. Additionally, DCAPs can only be used for dependents under the age of 13 or those with a qualified disability, and the plan will only cover certain expenses such as medical or sitter costs.