Understanding DCAP Reimbursements: Application Fees, Deposits, and Indirect Expenses

Understanding DCAP Reimbursements: Application Fees, Deposits, and Indirect Expenses

by | Feb 6, 2025 | Blog

Navigating the intricacies of Dependent Care Assistance Programs (DCAP) can be challenging, especially when it comes to understanding what expenses qualify for reimbursement. One common question that arises is whether application fees, deposits, and similar expenses can be reimbursed. Here, we break down the IRS regulations and provide clarity on this topic.

What Are Indirect Expenses?

Indirect expenses are costs that are not directly for care but are necessary to obtain care. Examples include application fees and deposits paid to day-care centers or preschools. According to IRS regulations, these expenses may qualify for reimbursement under a DCAP if they meet specific criteria.

Criteria for Reimbursement

To be eligible for reimbursement, indirect expenses must:

  1. Be Required for Care: The employee must be required to pay these expenses to obtain related care.
  2. Meet DCAP Rules: The expenses must comply with DCAP rules and the plan document.
  3. Relate to Provided Care: The care to which these expenses relate must actually be provided.

Examples of Reimbursable and Non-Reimbursable Expenses

  • Reimbursable: If a DCAP participant pays a $100 application fee to secure a spot at a new day-care provider, this fee can be reimbursed once the care is provided.
  • Non-Reimbursable: If a participant pays a $100 deposit to a preschool but later decides not to enroll the child, the deposit is not reimbursable since the care was not provided.

Timing of Reimbursement

The IRS does not specify whether indirect expenses can be reimbursed in full once care commences or if they must be reimbursed proportionately over the duration of the care agreement. To err on the side of caution, it is advisable to prorate the reimbursement over the agreement’s duration. For instance, if the agreement is month-to-month, the entire fee might be reimbursed after the first month of care. For longer agreements, the fee should be prorated accordingly.

Conclusion

Understanding the nuances of DCAP reimbursements for indirect expenses like application fees and deposits is crucial for both employers and employees. By ensuring these expenses meet the necessary criteria and timing the reimbursements appropriately, you can navigate the DCAP rules effectively and make the most of your benefits.

Source: Thomson Reuters

Dependent Care FSA: 5 Important Facts

Dependent Care FSA: 5 Important Facts

by | Aug 17, 2022 | Blog

A Dependent Care FSA, or DCA, is a flexible spending account that allows employees to contribute to a portion of their paycheck, pre-tax, to pay for qualified dependent care expenses. Here is a list of five facts regarding this account.

Fact #1: Any participant of this account can enjoy a 30% average tax savings on the total amount they contribute to a DCA.

Fact #2: Contributing money to this account starts by first making an annual election during open enrollment. From there, your employer will deduct the election amount from your paycheck before taxes are assessed in equal amounts throughout the year.

Fact #3: You can contribute up to the IRS limit of $5,000 annually on income tax returns if filing single or married jointly. If married and contributing to an account separately, you can contribute up to $2,500 each, or $5,000 total.

Fact #4: Eligible expenses for a DCA must be for the purpose of allowing you to work or look for work. Services may be provided at a child or adult care center, nursery, preschool, after-school, summer day camp, or a nanny in your home.

Fact #5: There are two methods to use funds in a DCA. One option is paying directly from your account through a benefits debit card (only if your care provider accepts credit cards). The second option is paying out-of-pocket and then file a reimbursement claim with your expense documentation.