Dependent Care

Dependent Care Frequently Asked Questions

Q: Is there a limit on the amount allowed under a Dependent Care Plan?
A: Yes, there is a federal limit of $5000 annually for a married couple filing jointly.

Q: What are the general tests for a qualified dependent care expense?
A:There are two general tests: First, the care must enable the employee (and spouse) to be gainfully employed. Second, the care must be for a dependent child age 12 or younger or for a disabled spouse or dependent.

Q: Are expenses incurred at a daycare center that complies with all state and local regulations an eligible expense?
A: Yes.

Q: What if the child is cared for by a baby-sitter at the baby-sitter's home?
A: This is still an eligible expense.

Q: What if the child is cared for by a baby-sitter in the employee's home?
A: This is an eligible expense as long as the baby-sitter is not related to the employee or spouse. Related in this case means under age 19 or a tax dependent of the employee or spouse.

Q: Are Kindergarten expenses eligible under this plan?
A: In general, no. The IRS has held that expenses that are primarily for the education of the child rather than for “expenses paid for the care of a qualifying individual” are not eligible. Thus, any type of “schooling” would not be eligible. This includes expenses for kindergarten, whether full or half-day, public or private, state-mandated or voluntary as long as the primary purpose is to educate.

Q: What about nursery school?
A: These expenses have been held to be eligible assuming the major purpose is the care of the child, even though the school may furnish lunch and educational services.

Q: Can nannies or other household employees be eligible as providers?
A: Services provided by these employees are eligible for reimbursement only if service is provided specifically for the care of the child. If these employees are paid for the “performance in and about the taxpayer’s home of ordinary and usual services necessary to the maintenance of the household”, day care expenses are not qualified.

Q: In the case of divorced parents, which one is entitled to use a dependent care plan?
A: A special rule allows the parent with custody to use this exemption, even though the non-custodial parent may be entitled to the dependency exemption. The non-custodial parent may not treat the child as a qualifying individual even if he or she is financially responsible for providing the care. This is because the child does not live with that parent and the care does not enable that parent to work. Further information is contained in IRS Publication 503.

Q: What is the meaning of "expenses incurred" and how does that affect reimbursement of expenses?
A: An expense is not “incurred” until the service is actually provided. One particularly vexing problem is IRS insistence that expenses are incurred before they can be reimbursed. This means that a plan should not reimburse a claim in August for the participant’s advance payment of a child care bill for care to be provided in September.

Q: Can a plan reimburse expenses that have been incurred but not paid?
A: Yes, the actual payment of eligible expenses under both dependent care and medical care is not relevant. If the expense is a qualified expense, it can be reimbursed so long as the services have been rendered.

Q: What is needed to substantiate a dependent care claim?
A: You will need a bill, invoice, or receipt from the provider that shows what period of time that day care services were provided, the charge for these services and the name of the provider. This documentation should be accompanied by a signed Claims Sheet. A canceled check does not establish these requirements.

Q: Can changes be made to the amount elected for dependent care benefits?
A: In general, changes to the amount elected can only be made during the open enrollment period each year or in the event of the authorized “Change in Family Situations”. Additionally, for Dependent Care; an election change is allowed if there is a significant change in the cost or services provided and this change is initiated by the provider. For example, if a day care provider increases rates significantly, an election change could be made. On the other hand, a change would not be allowed if the participant simply chose to change day care providers regardless of any price differences.

Q: Are there any special tax reporting requirements for dependent care?
A: Yes. Participants in a Dependent Care Plan will need to report the TIN (or SSN) of their day care providers on Form 2441 when they complete their annual income tax reporting. Participants will also notice that their W2 forms reflect the amount of income allocated to Dependent Care benefits for the entire tax year.

Q: How do I enroll in dependent care benefits if I know that my child will not require a daycare provider for part of the year?
A: Employees who have children that may not require a day care provider for part of the year have to plan their payroll deductions more carefully. For example, day care services may not be required for children during the school year. In other families, the opposite may be true. These situations require calculating the total estimated annual dependent care expenses. This total amount is deducted in equal installments throughout the year from the employee’s payroll.

Q: How do I participate in Dependent Care when my child starts Kindergarten in the fall and will no longer need daycare?
A: Employees should calculate the total annual expenses for dependent care. In this case, it will be the expenses from January through the time Kindergarten begins. This annual amount will be deducted from your payroll in equal installments throughout the year. You should submit dependent care expenses as they are incurred at the beginning of the year. We will pay out reimbursement checks each month up to the amount that is currently credited to your account. Your expenses at the beginning of the year will exceed your reimbursements. After Kindergarten starts, your reimbursements will continue to be made (up to your total expenses) even though you have no expenses at that time of the year.

Q: What about summer camp that involves overnight stay(s)?
A: These expenses are not considered employment-related expenses. IRS officials have indicated that this limitation applies even if the camp allocates expenses for daytime and overnight activities or if the charge is the same for the regular daycare expense with an additional surcharge for the overnight expense. This is the “all or nothing” rule.

Related Facts

Average tax savings using the Dependent Day Care account is 25%!
You will need a bill, invoice or a receipt from your Daycare provider to submit a claim.
You can shelter up to $5,000 annually for a married couple filing jointly.