What are the DCAP reporting and recordkeeping requirements?

The tax exclusion for employer-provided dependent care assistance may not be claimed by an employee-taxpayer unless the employee reports, on his or her tax return, the dependent care provider's correct name, address, and taxpayer identification number (TIN). The required information must be included on Form 2441, Credit for Child and Dependent Care Expenses (filed with Form 1040), or Schedule 2, Credit for Child and Dependent Care Expenses (filed with Form 1040A). Where the day care provider is a tax-exempt organization, tax-exempt should be entered on the tax return instead of the TIN.

Due diligence in tracking down required information. If the employee does not provide correct information, an exclusion may still be claimed if he or she can show that due diligence was exercised in attempting to provide the required information.

Information returns. Employers that maintain dependent care assistance programs need not file the information returns required of group legal services plans, educational assistance programs, and cafeteria plans until the IRS develops the necessary forms and instructions.

Form W-2. The total amount incurred for dependent care assistance on behalf of an employee under a dependent care assistance plan must be reported on the employer's Form W-2 (Wage and Tax Statement). Specifically, the amount of dependent care assistance is reported in the box that shows dependent care benefits.

Valuation. If the program is a cash reimbursement arrangement, the amount reported is the total amount of cash provided by the employer to the employee for dependent care during the calendar year. If the actual amount is unknown, a reasonable estimate of the amount reimbursed must be furnished.

If dependent care assistance is provided in kind, the amount shown in the dependent care benefits box of Form W-2 is its fair market value based on a reasonable estimate of the amount an employee would have to pay for such care in an arm's-length transaction. Under a safe harbor rule, an employer may estimate fair market value as 125 percent of reasonably estimated direct costs, divided first by the total number of the facility's capacity and further divided by the number of days the facility is open. The result, the daily cost per dependent at the facility, is then multiplied by the number of days that each dependent of the employee used the facility in order to determine the fair market value of the in-kind assistance.

If an employer amends its cafeteria plan to provide a grace period for dependent care assistance, the employer may report in Box 10 of Form W-2 the salary reduction amount elected by the employee for the calendar year for dependent care assistance, plus any employer matching contributions.

Form 5500 requirements. Employers offering DCAPs are subject to the reporting and recordkeeping requirements imposed by the Internal Revenue Code. As a result, the DCAP must file an annual Form 5500 [see Annual report of employee benefit plan (Form 5500) at ¶14,510 ].

Employers offering day care centers under a DCAP are also subject to ERISA's reporting and recordkeeping requirements [see What records need to be kept for fringe benefit administration at ¶11,450 ].

Withholding taxes. Payments made to an employee for dependent care assistance by an employer who has reason to believe that the employee will be able to exclude such payments or benefit from his gross income under Code Sec. 129 are not considered wages for purposes of withholding tax. Federal law provides that amounts up to $5,000 ($2,500 if married and filing separately) per year paid or incurred by an employer for dependent care assistance provided to an employee are not subject to withholding.

State law. The majority of states follow the federal treatment of such payments. Be sure to check State Laws for the laws that apply in your state(s).