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Exclusion of Dependent Care Benefits


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#1 Bud

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Posted 06 March 2002 - 12:15 PM

My company has two child care programs. One program is a typical dependent care assistance plan where employees contribute a portion of their salaries to the plan and get reimbursed from the plan after submitting a claim. The other program is a back-up program for occasions when an employee's regular child care provider is unavailable. The back-up program is free to employees and is paid for by my Company.

Could someone confirm or correct my opinion that both benefits have to be combined for the exclusion under Section 129. In other words, combined amounts under $5,000 are excludable and amounts above $5,000 are taxable income. If an employee uses the back-up program, it reduces the amount that can be claimed tax free from the dependent care assistance program.

#2 mroberts

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Posted 07 March 2002 - 10:18 AM

If the day care is free it would be no different than their mother
watching them, so it would not take away from the $5000 cap for the year. A change form should be filled out so the regular daycare is not paid for that time.

#3 Bud

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Posted 07 March 2002 - 01:10 PM

Thanks for chiming in.

It is different than going to your mother becaue the child care is provided by the employer so that the employee can work. When an employee gets something from his or her employer for work, that's compensation. When that something is childcare the first $5,000 is not treated as compensation. Isn't that the purpose of Code section 129?

#4 SLuskin

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Posted 07 March 2002 - 04:42 PM

This sounds like a de minimus fringe benefit that would not have to be considered.
Also, I have some employers with on-site daycare that give discounts to their employees and charge full price to non-employees. The discounts are not taken into account when figuring the $5000.

#5 mroberts

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Posted 07 March 2002 - 04:48 PM

If your company is not located in a major metropolitan area and has a parking lot and you don't have to pay to park, is that a benefit? What about being a drop off center for your clothes to be dry cleaned? Or what about having an ATM on your first floor? These are all benefits that employers can provide, as well as about 100 others, that do not impact the employee adversely in any financial way.

#6 Bud

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Posted 07 March 2002 - 05:15 PM

Parking benefits are excludable under a Code Section 132(f). The services and ATM are not free, but the mere convenience of their availability may be excludable as a de minimis benefit under Code section 132(e). Sure, we get a lot of things for free at work and if they are not business related, they are income unless they are excluded under some Code section. Perhaps, when something is so small it doesn't make sense to account for it and report it to the IRS, it is de minimis.

Under Code section 61, the fair market value of the benefit is the amount of the benefit. So a discount is income unless it is excludable under a Code section.

I still think the back-up care is dependent care that is excludable to the extent permitted by Code section 129. If my company was in the business of providing child care (which it is not), free child care would be excludable under a 132 Code section (like airline employees who get to fly for free under 132(B)).

#7 And another thing ...

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Posted 08 March 2002 - 10:34 AM

Bud, I think you are on the right track. Childcare in order to work is compensation that is excludable under 129.

I have a client with a similar structure. The backup care fair market value is less than the cost of tracking it and coordinating it with elective contributions to for dependent care. Because the admin costs were greater than value of the benefit, I told them the IRS would likely see it as an deminimus fringe benefit. They limit backup care to three days. That's Sluskin's view.

I have another client who wanted to provide backup care for 5 days (ie, a week). I gave the same analysis and my client felt the deminimus argument would be a stretch. They charge a backup care fee for which employees get reimbursed with claim to their dependent care account.

So, you can see that the claim to dependent care account is appropriate because the backup care is dependent care under 129. I think mrobert's analysis makes sense to the extent the IRS is unlikely to catch this stuff, but the law treats it as compensation if it is not excludable, whether the IRS finds it or not.

#8 Do

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Posted 15 March 2002 - 10:49 AM

I just had the same question asked of me at my company. I couldn't find a way to keep the back-up care out of employee's taxable income. It doesn't fall under a de minimis fringe benefit under reg 1.132-6 because the frequency of use by employees is too easy to track. Plus, in some cases, my company would reimburse the employee for back-up care costs, which clearly is not de minimis under the regs.

So, the rule laid out for my company is regular daycare (on which an employee can claim a reimbursement from his or her DCAP account) and free backup care (paid for by your company) are dependent care assistance benefits subject to the $5,000 limit. No more than $5,000 per year in dependent care assistance is excludable from an employee's taxable income. Anything over $5,000 is included in taxable income.

This caused a lot of grief because coordinating DCAP with back up care would be difficult on our system. But, that's the rule in order to keep back-up care excluded from income.

Can anyone advocate for the DCAP folks?