Did you know that "child care's effect on workforce participation, productivity, and business bottom line is more significant than we've recognized"?
U.S. Chamber of Commerce Foundation
Center for Education and Workforce
AND The National Academies of Sciences, Engineering and Medicine Board on Children, Youth, and Families convened an ad hoc committee to address the high cost of child care for working families.
Although no over-arching solutions cure the high cost of child care for working families, federal income tax deductions and credit incentivize employers to support their employees with child care related benefits.
IRS supported flexible spending accounts allow employees to choose the benefits they want from a package of programs: The significance of such programs is the aggregation of a variety of benefits designed for all employees. Employees especially appreciate the tax free financial assistance.
There are several types of benefits included the cafeteria (IRS Code Section 125 plans) and flexible spending account (FSAs IRS Code Section 129) plans.
- Cafeteria Plans allow employees to choose among a "basket" of benefits that generally include health and group life insurance, medical reimbursement plans for non-insured expenses, and child or elder care expenses, 401(k) retirement savings plans and others. Funding the cafeteria plan includes the employee and the employer contributions. Employer contributions to cafeteria plans are tax deductible for the employer and are not subject to income tax for the employee. Employee contributions through a payroll withholding provides taxfree income. See IRS Publication 15-B, Employer's Tax Guide to Fringe Benefits Page 3 for more information and contact your tax advisor.
- Flexible Spending Accounts (FSAs) are tax-deferred savings accounts established by the employer to help the employee pay for certain medical expenses, group life insurance and dependent-care expenses. For purposes of this presentation, only dependent care flexible spending accounts will be reviewed.
- Dependent Care Assistance Plans (DCAPs) are tax-deferred funds set aside from an employee's gross salary through payroll deduction. Payroll deduction funds are transferred to the employee's DCAP account to provide reimbursement for qualified child care expenses. After the employee accumulates dependent care expense funds in the account, receipts for child expenses are submitted to the account administrator for reimbursement. The account administrator reimburses the employee for costs up to a maximum of $5,000 per year for household child care expenses. Unused set-aside amounts in the account are lost if reimbursement has not been applied for by the end of the plan year. Neither the employer or the employee pays payroll taxes on the amount of salary set aside for child care reimbursement. A DCAP salary-reduction can be offered alone or as part of a flexible benefit program. For more information, see IRS Publication 15-B, Employer's Tax Guide to Fringe Benefits Page 9 and contact your tax advisor.
Employer contributions to dependent care through FSAs: Employers can choose to contribute to employees' Dependent Care FSAs to the extent that the combined employer and employee contribution does not exceed $5,000 per year. For purposes of the $5,000 limitation, both the FSA and DCAP plan contributions are considered.
Employer contributions to Dependent Care FSAs are not a "match" and employees will receive the full contribution regardless of what their election is, even it may be $0.
Supporting child care with subsidies: An employer may offer 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. The common approach is to provide child care scholarships or negotiate discounts with child care providers as part of a contractual relationship.