New Rules for Taxing DCAP Benefits
Part of getting a typical 9-5 job is looking at the health benefits such as insurance, a Flexible Spending Account (FSA) or Health Savings Account (HSA). However, most people don’t realize that there is another tax-advantaged account that can help you save money on childcare or looking after dependents. The account is known as a Dependent Care Assistance Program (DCAP), or Dependent Care FSA.
Just as HSAs allow employees to deposit a certain portion of their pre-tax salary for healthcare purposes, DCAPs are used to set aside pre-taxed money every pay period for approved child and elder care expenses. Although DCAPs can’t cover all of your caregiving expenses, they do take care of a good portion of those costs while reducing your federal tax obligations.
Generally speaking, unused DCAP benefits aren’t carried over to the next plan year - in other words, you have to use it or lose it. However, the IRS has eased up the rules for 2020-2021 because of the COVID situation, offering relief under the American Rescue Plan Act. This is good news for all employees who have dependents because the money you deposit into a DCAP isn’t immediately lost if you don’t use it within the set timeframe. It can carry over to the next year, and you can even add more of your salary to the account if necessary, allowing you to pay for certain caregiving expenses completely tax-free (federally).
The new guidance by the IRS on the taxability of DCAP benefits specifically encourages employers to:
extend the 2.5 month grace period for the DCAP
allow unused DCAP benefits to carryover to either 2021 or 2022 (depending on when the plan year began).
The best part of all of this is, if a situation arises where you must pay for child or elder care, you can take out all those saved dollars from your DCAP account and pay for those expenses, without being taxed for it!
Taxes can be tricky, but there are several ways to ensure you only pay for what you owe. For more tax advice and financial planning tips, visit or contact Landmark Tax Service.