COVID Temporary Increases

The Consolidated Appropriations Act (CAA) of 2021 and the American Rescue Plan Act of 2021 (ARPA) made these temporary changes to DCAPs.

Plan amendments must be adopted by the last day of the plan year to implement this change. However, plan participants can only change their elections prospectively.

If contribution amounts were excludable from income in the year they were contributed, they will continue to be excludable if rolled over and withdrawn in the following year.Tooltip See IRS Notice 2021-26 for more information on the taxation of rollover contributions


A dependent care assistance program (DCAP) is an employer benefit plan that provides dependent care assistance to employees.

The term “dependent care assistance” means employer payments or reimbursements from a DCAP account for dependent care services that are necessary to enable the employee to be gainfully employed.  If the employee is married, the spouse must also be gainfully employed, a full-time student or incapable of self-care.  Dependent care expenses include:

The DCAP account may be funded by the employer or the employee (or both) through pre-tax payroll deductions, provided these contributions comply with DCAP Limitations.

Qualifying Individual

The term “qualifying individual” means:

Federal Regulations

DCAPS are not generally considered welfare benefit plans subject to ERISA. Instead, they are established and regulated by IRS Code Section 129. If a DCAP is part of a wrap document plan that includes ERISA plans, the document should specify that the DCAP is not subject to ERISA.

Most DCAPs are Flexible Spending Arrangements offered under a Section 125 Cafeteria Plan and thereby also subject to certain requirements of that provision as well, such as:

Note that employers may also maintain a DCAP outside of a cafeteria plan with no employee contributions.

Mid-Year Election Changes

Salary reduction elections for DCAPs are generally irrevocable for the duration of the plan year; however, mid-rear changes are permitted when certain events occur as described below. Note that these are changes allowed in the regulations, but employers may be more restrictive in what changes are allowed under their plan. Either way, permitted changes must be outlined in the plan document.

Change Events

  1.  Change in Status (Note that the change must be one that affects and is consistent with a change in eligibility of the expenses for exclusion from income under section 129.)
    • Change in marital status.
      • Including marriage, death of spouse, divorce, legal separation, and annulment.
    • Change in number of dependents.
      • Including birth, death, adoption, and placement for adoption.
    • Change in employment status of the employee or spouse.
      • Including termination or reduction of hours; or, the need for care changes due to a job change or change of work hours.
    • Dependent no longer satisfies the eligibility requirements.
      • Including attainment of age, change in student status, or any similar circumstance.
  2. FMLA Leave
    • Employees on FMLA leave are entitled to revoke an election of non-health benefits (such as a DCAP) under a cafeteria plan to the same extent as employees taking non-FMLA leave.
  3. Change in the Cost of CareTooltipNote that this change is not allowed for health FSAs
    • Including when the dependent care provider changes prices, or when a participant changes dependent care providers.

When an election is decreased, it cannot be less than the amount that’s already been contributed to the plan. The change must also be consistent with the event type. For example, an election can not be decreased when the event would justify an increase (such as a day care provider raising prices).

IRS officials have indicated that the permitted election change rules for DCAPs are intended to be liberally interpreted.  However, the permitted election change rules are extensive and complex and advice from an attorney or benefits professional is recommended when establishing the rules for your plan.

State Regulations

Because DCAPs are not generally subject to ERISA, they cannot claim ERISA preemption and may be subject to state and local laws, such as:

Note that some states give employers a state tax benefit for providing dependent care assistance.

Plan Time Frames

Coverage under the plan is generally for a 12-month period.  Expenses incurred during the plan year can only be reimbursed from funds contributed during the same 12-month period, with certain exceptions noted below.

Grace Period: If allowed in the plan document, claims may be reimbursed from a prior plan year for expenses incurred up to two months and fifteen days after the end of that plan year.

Run Out: Plans may establish a run out period during which claims incurred during the prior year may be presented for payment in the following year, but still paid from the prior year’s contributions. For example, a participant may have 30, 60 or 90 days after the end of the plan year to submit claims incurred from that plan year.

Plan Document

IRS regulations require that DCAPs have a written plan documentTooltipThat meets the requirements of Code Section 129 (paragraphs 2-8) The plan document must state the DCAP limitations, as well as the expenses that can be reimbursed.

The plan may be more restrictive relative to the type of expense reimbursed or who may be reimbursedTooltipIf nondiscrimination tests are met than what is allowed in the regulations, provided the restrictions are clearly spelled out in the plan document.

The plan document must also describe the following (when applicable to the plan):

DCAP Limitations

Pre-tax payroll deductions that may be contributed to the DCAP on an annual basis are limited to the lesser of the employee’s or the employee’s spouse’s earned income for the year, or:

If a spouse is a full-time student or is physically or mentally incapable of caring for themselves and has the same principal residence as the employee, the spouse is a qualifying individual and deemed to be gainfully employed with an income of:


In general, participation in a DCAP may be extended to any employee. Employers may limit participation to health plan participants or certain classes of employees, as long as nondiscrimination tests are met and participation requirements are outlined in the plan document.

Expense Reimbursements

Expense Limitation

Unlike Health FSAs, the rules do not require reimbursement of expenses that exceed the amount currently in the participant’s DCAP account.

Employers can only reimburse expenses out of a DCAP for “dependent care assistance,” defined as payment for, or provision of those services, which if paid for by the employee would be considered employment-related expenses under Code Section 21(b)(2). The employer’s plan may be more restrictive than what is allowed in the regulations and the plan document must state what expenses are reimbursable.

Expenses are employment-related expenses only if they meet both of the following requirements:

  1. The employee incurs the expenses to enable the employee (and the employee’s spouse) to be gainfully employed; and
  2. The expenses are for the care of one or more qualifying individuals.

Examples of DCAP reimbursable expenses include:

Employers may find IRS Publication 503 (Child and Dependent Care Expenses) helpful in identifying employment-related expenses. This publication, however, is meant to provide guidance for the Dependent Care Tax Credit, not DCAPs – so caution when using it is advised.

Plan Statements

The plan must furnish to an employee on or before January 31 a written statement showing the amounts paid from the DCAP in providing dependent care assistance to the employee during the previous calendar year.


Nondiscrimination requirements are described in Code Section 129; however, there are no regulations specifying how to apply nondiscrimination tests to DCAPs. Therefore, employers should use their best effort in interpreting the requirements and performing these tests.

Generally, the contributions or benefits provided under the plan should not discriminate in favor of employees who are owners or highly compensated employees (HCEs) within the meaning of Section 414(q) or their dependents.

A DCAP should pass four tests to meet this requirement:

Eligibility Test: Are enough non-HCEs eligible to benefit from the plan?TooltipCode Section 129(d)(2)

Contributions and Benefits Test: Do contributions or benefits provided by the DCAP discriminate in favor of HCEs and their dependents?TooltipSection 129(d)(2)

More-Than-5% Owners Concentration Test: Do HCEs who are more than 5% owners receive more than 25% of the DCAP benefits?TooltipCode Section 129 (d)(4)

55% Average Benefits Test: Is the average benefit provided to non-HCEs under all plans of the employer at least 55 percent of the average benefit provided to HCEs under all plans of the employer?TooltipCode Section 129 (d)(8)

Additional rules apply where the DCAP is offered under a cafeteria plan.

A DCAP provided to just non-highly compensated employees will pass all of the required nondiscrimination tests.

Because of the lack of formal guidance provided in the regulations, employers should seek assistance from a competent attorney, CPA, or benefits professional before performing these tests.