Clarification for Dependent Care Reimbursement Plans

Many employers offer dependent care reimbursement programs as a benefit for their employees. Under these programs, employees can estimate their dependent care expenses for the year, elect to have the money deducted from their pay, and then reimburse themselves on…

Many employers offer dependent care reimbursement programs as a benefit for their employees. Under these programs, employees can estimate their dependent care expenses for the year, elect to have the money deducted from their pay, and then reimburse themselves on a tax-free basis from the money set aside in their accounts as they incur employment-related dependent care expenses throughout the year. The IRS has recently issued proposed regulations (Proposed Treasury Regulations Sections 1.21-1, 1.21-2, 1.21-3, and 1.21-4, which you can access here) shedding some light on what types of expenses can qualify as employment-related expenses for which an employee may obtain tax-free reimbursement under a dependent care reimbursement plan (officially known as a dependent care assistance program or “DCAP” under section 129 of the Internal Revenue Code).

For instance, the proposed regulations clarify that when it comes to school-related expenses, nursery school and preschool can qualify as employment-related expenses as well as before- and after-school care. The IRS goes on to note that a day camp will qualify even if the camp is a “specialty” camp, such as a camp devoted to just soccer or computer:

The IRS has received many inquiries about whether the cost of a day camp that specializes in a particular activity, such as soccer or computers, may be an employment-related expense. To provide certainty for taxpayers and enhance administrability, the proposed regulations provide that the full amount paid for a day camp or similar program may be for the care of a qualifying individual although the camp specializes in a particular activity.

However, what about kindergarten? The IRS says:

The proposed regulations clarify the existing rule that expenses for programs at the level of kindergarten and above, however, are primarily for education and, therefore, are not employment-related expenses.

A couple of good articles on the new regulations:

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