Know nothing about DCAP's

[jeanine]

I know next to nothing about DCAP's except that it is a way to pay for dependent care expenses. If a company wants to institute a DCAP are there any rules as far as pro-rating contributions? By this I mean company plans to begin offering under their cafeteria plan beginning 3/1/05. Can the employee withhold the maximum annual amount contributing January and February retroactively and submitting dependent care expenses from January and February? Thanks for any replies.

[Alf]

The $5,000 max contribution does not have to be pro-rated for short plan years, I don't think. You cannot retroactively take contributions for Jan and Feb, but you should be able to just let them take out their annual amount for the 10 months left in 2005 instead of over 12 months (depending on confirmation of the previous sentence). Expenses can't be reimbursed for periods predating the plan document and the document cannot legally be drafted with a retroactive effective date, but practically if an existing (unwritten) arrangement was formalized in Feb with a 1/1 effective date, noone would care. I guess that the fact that no payroll withholding was done in Jan and Feb is a pretty big red flag, though. My point is that there is no IRS enforcement of these, so just keep the documentation up to snuff in your files.