12 May Dependent Care Benefits and COVID-19 Outbreak
A dependent care assistance program (DCAP) allows employees to pay for qualifying dependent care expenses, such as daycare expenses, on a tax-free basis, up to certain limits.
With many schools and daycare facilities closing due to the COVID-19 outbreak, employees may want to change the amount of their DCAP contributions. Also, employees may be concerned about not being able to use all of their DCAP funds this year due to changing child care needs and availability.
Although the IRS has not issued any specific relief or guidance for DCAP benefits due to the COVID-19 outbreak, existing rules may help employees impacted by the outbreak. For example, under existing rules, DCAPs can be designed to:
- Allow employees to change their pre-tax elections when there is a change in employment status or if there is a change in cost or coverage of dependent care services.
- Include a grace period to allow employees to use any unused funds that remain at the end of the plan year for an additional 2 ½ months. For example, this would allow employees with DCAPs that operate on a calendar year basis to use their 2020 funds for eligible dependent care expenses incurred through March 15, 2021.
- Allow terminated employees to spend down their accounts rather than immediately forfeiting the unused amounts.
To assist employees impacted by the COVID-19 pandemic, employers should review their DCAP’s rules for mid-year election changes, grace periods and spend-down provisions for terminated employees.