What is a Dependent Care Assistance Plan (DCAP)?
A DCAP lets you set aside some money for eligible expenses before your employer deducts taxes from your paycheck. This results in a tax savings because the amount of income your taxes are based on would be lowered.
The amount you contribute to a DCAP through payroll is FICA, Federal, and State tax-free.
The amount in your DCAP account can be used during the plan year set by your employer to pay for your qualified expenses and services.
How do DCAPs Work?
A Dependent Care Assistance Plan (DCAP) allows you to use pre-tax dollars to pay for eligible expenses related to a childcare center, babysitter, nanny (birth through age 12), summer day camp, before or after-school care, disabled dependent and/or spouse care, and elder care.
DCAP becomes available as the funds are contributed. This means when payroll is processed and your paycheck is available to you, your Dependent Care contributions will be applied to your account and available for reimbursement.
Depending on how your employer set up their accounts, money left in your DCAP at the end of the plan year may be used for an additional 21/2 months (grace period).
Some employers do not offer a grace period, but allow a “run out period” for claims to be filed after the end of the plan year. To avoid having too much money at the end of the plan year, you may want to spend time calculating your expected or planned dependent care for the plan year to determine what amount to list for your annual enrollment.
How much can I contribute?
The minimum and maximum amounts you can contribute to your DCAP are set by your employer. However, the maximum allowed by the IRS in 2023 is $2,500 single/married filing separate and $5,000 married filing jointly.
Under the IRS rules that governs DCAP, the amount you may contribute is based on calendar year.
The amount that you elect for the DCAP is divided evenly over the pay periods in the plan year.
The amount that is deducted per pay period is the amount of your annual election divided by the number of pay periods left in the plan year. Only employees that are enrolled for the entire plan year will have their deductions broken up over 12 months.
How can a Dependent Care plan help?
If you have any specific questions about how an DCAP can benefit you or what types of expenses are qualified under DCAP, contact us!
We would love to help you!
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