8892 / Is dependent care assistance provided by an employer as a fringe benefit taxable income to the employee? Do any nondiscrimination requirements apply in order for these benefits to be received tax-free?
(1) Plan contributions or benefits must not discriminate in favor of highly compensated employees as defined in IRC Section 414(q) or their dependents.(2) The program must benefit employees in a classification that does not discriminate in favor of highly compensated employees or their dependents.
(3) No more than 25 percent of the amounts paid by the employer for dependent care assistance may be provided for the class of shareholders and owners, each of whom owns more than five percent of the stock or of the capital or profits interest in the employer (certain attribution rules under IRC Section 1563 apply).
(4) Reasonable notification of the availability and terms of the program must be provided to eligible employees.
(5) The plan must provide each employee, on or before January 31, with a written statement of the expenses or amounts paid by the employer in providing such employee with dependent care assistance during the previous calendar year.
(6) The average benefits provided to non-highly compensated employees under all plans of the employer must equal at least 55 percent of the average benefits provided to the highly compensated employees under all plans of the employer.2
The dependent care assistance plan may disregard any employee with compensation that is less than $25,000 annually for purposes of the 55 percent test if benefits are provided through a salary reduction agreement.3 For this purpose, compensation is defined in IRC Section 414(q)(4), but regulations may permit an employer to elect to determine compensation on any other nondiscriminatory basis.4
For purposes of the eligibility and benefits requirements (described in items (2) and (6) above), the employer may exclude the following employees from consideration:
(1) Employees who have not attained age 21 and completed one year of service (provided all such employees are excluded).(2) Employees covered by a collective bargaining agreement (provided there is evidence of good faith bargaining regarding dependent care assistance).5