Legal Definitions - dependent care plan

A Dependent Care Assistance Plan (DCAP), often referred to as a dependent care flexible spending account (FSA), is an employer-sponsored benefit that allows employees to set aside pre-tax money from their paycheck to pay for eligible dependent care expenses. This means the money contributed to the DCAP is not subject to federal income tax, and often state and local taxes, effectively reducing the employee's taxable income.

To use a DCAP, an employee typically elects to contribute a portion of their salary into the account throughout the year, up to an annual limit set by the Internal Revenue Service (IRS). When an eligible dependent care expense is incurred, the employee pays for it out-of-pocket and then submits a claim to their DCAP administrator for reimbursement.

The funds in a DCAP can only be used for care expenses for certain dependents:

• A child under the age of 13.
• A spouse or other dependent who is physically or mentally incapable of self-care and lives with the employee for more than half the year.

Eligible expenses generally include costs for services that allow the employee (and their spouse, if married) to work or look for work. Examples include daycare, after-school programs, preschool, and in-home care for a qualifying disabled dependent.

Examples:

• Working Parents with Young Children: Maria and David both work full-time. Their 4-year-old daughter, Lily, attends a licensed daycare center five days a week. They enroll in their employers' DCAP. Each month, a portion of their combined salaries is withheld pre-tax and deposited into their DCAP. When they pay the monthly daycare bill for Lily, they submit the receipt to their DCAP administrator and are reimbursed from their account. This reduces their taxable income while covering a necessary expense for their child under 13, allowing them to work.

• After-School Program for a School-Aged Child: Sarah is a single mother working full-time. Her 9-year-old son, Alex, attends an after-school program at his elementary school until she finishes work each day. Sarah contributes to a DCAP through her employer. The money she pays for Alex's after-school program, which provides care while she is at work, is an eligible expense. She pays the program directly and then requests reimbursement from her DCAP, benefiting from the pre-tax savings on those care costs. Alex is under 13, making him an eligible dependent for this type of care.

• In-Home Care for a Disabled Spouse: Robert works full-time and cares for his wife, Emily, who has a severe physical disability that prevents her from caring for herself. He hires a home health aide to assist Emily during his working hours. Robert uses his employer's DCAP to pay for the home health aide's services. Since Emily is his spouse, lives with him, and is physically incapable of self-care, her care expenses qualify. Robert pays the aide and then seeks reimbursement from his DCAP, reducing his taxable income for the essential care that enables him to maintain his employment.