8891 / What is a dependent care assistance program?
“Employment-related expenses” are amounts incurred to permit the taxpayer to be gainfully employed while he or she has one or more dependents under age 13 (for whom he or she would be entitled to a personal exemption deduction under IRC Section 151(c) absent the suspension of the personal exemption for 2018-2025) or a dependent or spouse who cannot care for themselves. The expenses may be for household services or for the care of the dependents.2
The plan is not required to be funded.3 A dependent care program may also be provided through a cafeteria plan.4 See Q 8892 for a discussion of the tax treatment of employer contributions to a dependent care assistance program. See Q 8894 on the limitations to the amounts that an employee may exclude from income.
Planning Point: With so many employees working from home, many employees are rethinking contributions to dependent care FSAs. The rules governing changes to dependent care FSA contributions are more flexible than health FSAs. Employees are permitted to make mid-year changes in pre-tax contributions if their circumstances relating to the need for dependent care changes. Employees can reduce their contributions if they are working from home and do not need childcare, or can increase the contributions when they return to work and need to provide for increased childcare costs.
Further, employees who have been furloughed and laid off might want to ask whether their plan contains a spend-down feature. These features are optional, but allow former employees to seek reimbursement for dependent care expenses incurred through the end of the tax year (even if their employment has been terminated). Employers have the option of adding a spend-down feature at any time.
1. IRC §§ 129(d)(1), 129(e)(1).