Dependent Care Account
The 2020 limit for contributions is $5,000.
DCAP stands for Dependent Care Assistance Program and is also a Flexible Spending Account. An employee can use a DCAP to be reimbursed for employment-related expenses that allow the employee and his or her spouse to be “gainfully employed.” Employment-related expenses apply only to certain individuals.
A cafeteria plan lets participants elect coverage under a DCAP with an annual limit of up to $5,000. They pay for that coverage with pre-tax salary reduction dollars. At the end of each month, the DCAP reimburses the dependent care expenses that occurred during the month. Assume that Jane elects the full $5,000 of coverage. She must reduce her taxable wages by $5,000 (the annual premium) to pay for the coverage. By participating in the DCAP, Jane would achieve tax savings but subject to additional factors that affect the calculation of the tax savings.
Important features of the plan
DCAPs are not front loaded like a typical FSA, which means that the available funds will grow as contributions are made throughout the plan year. Not all daycare providers accept benefits cards, some expenses will have to be paid out of pocket and then reimbursed through a claim.
Who qualifies as a “dependent” for which the funds can be used? DCAP expenses could consist of having a babysitter or day-care provider take care of an employee’s child (under the age of 13) while Mom and Dad are both working, or taking care of a spouse or other tax dependent who lives with the employee and is incapable of self-care.
Some services will not qualify, such as overnight camps.