Under a dependent care
assistance plan,
employees can exclude from gross income up to $5,000 ($2,500 for married
employees filing separately) of employer-provided dependent care
assistance as a tax-free fringe benefit.
The dependent care assistance plan excludable amount is not subject to
FICA, FUTA, or federal income tax withholding. The cost of the dependent care
assistance plan benefit may
be paid through employer contributions to the plan, salary reductions
under a cafeteria plan, or a combination of the two methods.
The dependent care assistance plan exclusion may not exceed the earned
income of the employee or, if less, the earned income of his or her
spouse. The dependent care assistance plan must only cover the same type of expenses that qualify
for the dependent care tax credit (Form 2441).
Dependent Care Assistance Plan General Requirements:
• Dependent care assistance plan must be in writing and be for
exclusive benefit of employees,
• Dependent care assistance plan must provide reasonable notification of the availability and
terms of the program to eligible employees,
• Employer must provide each employee with an annual written statement
of amounts spent for dependent care assistance under the plan. Employer
must also report this amount on the employee’s Form W-2 as a memo entry
only, and
• Dependent care assistance plan may not discriminate in favor of highly compensated employees.
