3626 / What exclusion is available for employee participants in an employer-sponsored dependent care assistance program?

Editor’s Note: For 2021, employers had the option of amending DCAPs to offer up to $10,500 in tax-preferred benefits ($5,250 for married individuals who file separate returns).

An employee may exclude up to $5,000 paid or incurred by the employer for dependent care assistance provided during a tax year.¹ For a married individual filing separately, the excludable amount is limited to $2,500. Furthermore, the amount excluded cannot exceed the earned income of an unmarried employee or the lesser of the earned income of a married employee or the earned income of the employee’s spouse.²

An employee cannot exclude from gross income any amount paid to an individual with respect to whom the employee or the employee’s spouse was entitled to take a personal exemption deduction under IRC Section 151(c) (prior to the suspension of the personal exemption from 2018-2025) or who is a child of the employee under 19 years of age at the close of the taxable year.³  Additionally, the employee cannot reimburse the child's other parent for child care provided to their qualifying child.

With respect to on-site facilities, the amount of dependent care assistance excluded is based on utilization by a dependent and the value of the services provided with respect to that dependent.⁴