Flexible Benefit Plans: A section 125 plan or “cafeteria plan,” allows employers to offer a range of benefits. Employees choose from a menu of benefits and customize their benefits package. For example, some employees may have health insurance provided by a spouse’s employer and may choose a child care benefit instead.
The Benefits of Cafeteria Plans by Entrepreneur Magazine
Dependent Care Spending Assistance Plan (DCAP): Money is set aside from an employee’s gross salary into a nontaxable spending account to pay for child care. Neither the employer nor the employee pays taxes on the amount of salary reduced for child care. The employee is able to pay for child care expenses with tax-free dollars.
How Does DCAP Work?
A DCAP is one type of flexible spending account in which an employee sets aside a certain amount of pre-tax dollars, usually in the form of a salary reduction plan, per paycheck to pay for dependent care. Such an arrangement allows the employee to avoid paying income and FICA taxes on the amount used for dependent care assistance. Employers receive a tax advantage as well and do not have to pay Social Security, federal employment, and most state and local payroll taxes on the amounts provided for dependent care.
After the employee accumulates dependent care expenses, they submit receipts for these expenses to the dependent care account. The account then reimburses the employee up to a maximum of $5,000 per year for these expenses. This payment is not subject to either income or FICA tax because it is technically a benefit, not compensation. The employee cannot receive payment for any expenses that are more than the amount they have set aside in the dependent care account. Unused set-aside amounts in the account are lost.
A salary-reduction DCAP can be offered alone or as part of a flexible benefit program under which employees have more than one benefit option.
Child Care Subsidies: An employer offers workers a child care allowance or subsidy that families can use toward a child care arrangement of their choice. The employer contribution can be a percentage of the total cost of care, a flat amount for all participating employees, or determined by a sliding scale based on a family’s income.
Colorado Child Care Assistance Program
Child Care Vendor Plan: An employer or group of employers contracts with a local child care program to reserve slots for company employees. The employers pay a portion of the employee’s child care costs directly to a child care program.
Voucher or Reimbursement System - Voucher: Employers contract with child care providers or child care centers in the community for services for their employees. Parents are given vouchers for all or part of their child care costs and the child care programs redeem the vouchers for payment through the employer. Reimbursement: Employees choose the child care arrangement best suited to their needs (child care center, family child care home, after-school program) and then receive a reimbursement from the company for some portion of the costs.
Consortium Model: A number of employers come together on an industrial or geographic basis and pool resources to conduct joint child care projects. Consortium members generally share start-up costs and in return receive priority enrollment for their employees’ children. A new nonprofit agency may be established to provide the child care.