Dependent Daycare Question

[SLuskin]

I have a situation where the participant is the child's grandmother. The child is the grandmother's tax dependent and the child's parents are not in the picture.

The grandmother is employed full time.

The grandfather, however, is retired, but older. He is not able to take care of a 4 year old at all.

Can she participate in the dependent daycare account, or is she prohibited because she is married and her husband is not gainfully employed?

(I personally would never leave a 4 year old with a 70 year old).

Thank you.

[Guest Sieve]

I'm not a DECAP expert, but as long as the daycare expense is necessary "to enable the taxpayer to be gainfully employed" then it is permissible for a salary deferral dependent care assistance program through a cafeteria plan. Sp. if grandpa is unable to care for grandchild, whether physically or mentally, and grandmother cannot work without someone taking care of grandchild, then it would seem to me that the threshold requirements are met.

[jpod]

I am assuming that grandpa is grandma's spouse. Isn't there an earned income limitation that limits the amount of tax-free reimbursements to the "earned income" of the spouse with the lower earned income? There is a deemed earned income amount for someone who is disabled, but I don't think a retired senior would be considered "disabled" just because he is a senior.

[Guest Sieve]

jpod --

You're right. For some reason, I thought that social security benefits were included in this definition of "earned income" that limits the dependent care reimbursement amount, but I'm dead wrong. (And, as to whether retirement is a disability, I'll leave that to the retired to determine!!)

[SLuskin]

Thank you all.

I ended up asking our attorney for an opinion, which I have pasted below:

I agree with you that I do not find this situation is not covered in the regulations. I also searched a couple of secondary sources and don't see it addressed.

In my mind, it seems clear that the grandfather is not capable of caring for this child, regardless of whether he can technically care for himself. But the test is not whether he is capable of caring for the child, but rather whether he is capable of caring for himself. So to properly document the decision to permit these expenses to be reimbursed (i.e., to protect the plan sponsor), do you think that there is any way to try to get some type of doctor's note indicating that the grandfather DOES meet the "incapable of self-care" standard once a 4-year old is factored into the scene? Perhaps that latter analysis can be performed as a hypothetical factoring in the rigors of a pre-schooler left solely in his care, with the result being that he would no longer be able to care for himself.

[LRDG]

Disabled parents are addressed in the Dependent care expense regulations.

Employment related dependent daycare expenses the result of one employed parent/custodian and one disabled parent/custodian meet the IRS regs for qualified dependent daycare expenses for the qualified dependent grand/child.

If the disabled parent required care the result of a disability, the cost could qualify for reimbursement from a medical and/or dependent care FSA, in addition to the child's Dependent daycare expenses.