Dependent Care Plan

[Guest faceman]

I am a 2 person office and I am the owner or the S Corp. The other employee does not have dependents. Can I set up a 129 where I can have money taken from my paycheck each period and administer the plan myself? I've read different things about this plan and am not sure if I can participate.

[Jacmo]

There is nothing to prevent S-corp owners from participating in a 129 DCAP program, as long as you can pass the 55% test.

Unfortunately, since the other employee won't be participating, you are automatically going to fail the 55% test, which means you're back where you started taxwise.

This is a no go for you.

[Guest faceman]

The 55% test talks about all plans. If my employee gets health coverage and I don't (because I'm included on my wifes plan), does this help my cause?

There is nothing to prevent S-corp owners from participating in a 129 DCAP program, as long as you can pass the 55% test.

Unfortunately, since the other employee won't be participating, you are automatically going to fail the 55% test, which means you're back where you started taxwise.

This is a no go for you.

[oriecat]

Even if that is true (which I don't think it is), you would still have an issue with the 25% DCAP Key employee test.

[Bob R]

Unfortunately, you aren't going to find anything definitive on this.

First, the 55% test is not based on other benefits. It's based solely on the dependent care assistance program. Likewise, there is a 25% test that is similar to the concentration test under code section 125, but here it is also based on just the DCAP (the code section 125 test is based on all benefits).

There is no guidance on how you handle the situation where the NHCE has no dependents. If the person makes under $25K, then the person can be excluded from the 55% test - then you're left with the question as to whether you automatically pass or automatically fail when there are no other eligible employees.

I just don't think it's going to fly in this case. But, it is open to interpretation.