Child Dependent Care Plans

Under Internal Revenue Code Sections 125 and 129, employers may establish a dependent care assistance program that allows employee parents to set aside up to $5,000 of their salary for child care costs. Parents do not pay federal or state income taxes on this money they set aside.

Money set aside under such a program must only be used for child care services while the parent is working. Employer programs are usually operated on a calendar year basis, but may begin and end throughout the year. Parents must elect how much of their salary to set aside before the beginning of the program year. If parents don't spend all of the money they set aside each year, it will be turned over to the parent's employer. Parents may submit child care receipts to their employer up to 90 days after the end of the program year. If the program year ends December 31, 2015, this means the deadline to submit receipts is March 31, 2016.


If parents anticipate having money left over in their dependent care account, they may wish to give it to their child care provider before the year ends. To do so, parents should simply increase the amount they pay their provider. Or, the parents could give the unspent money to their child care provider within 90 days after the end of the program year. This can be done by the parent paying the provider the unspent money and then giving the provider another receipt to sign. The receipt should be filled out exactly the same as other receipts (do not identify the payments as a "contribution") and should indicate that the payments are for child care services delivered in the previous year. For example, a receipt filled out in February, 2009 might say "$250 for child care services December 15-19, 2008." This receipt represents an extra payment (or bonus) for the excellent services delivered by the provider during the program year.

It is illegal to carry over unspent money to the next program year. Some parents may want you to apply the unspent money to the care you provide next year. This is illegal, so do not agree to this. Money set aside under these plans can only be spent on child care services delivered this year. It is also illegal to give the provider unspent money and require the provider to return any portion of it to the parent. Parents should view the giving of any extra money to the provider as an opportunity for the provider to spend it on supplies, training, or equipment, or other items that will improve the quality of the child care services made available to their own child.

In order to keep their tax records organized, parents and providers should both sign a receipt at the end of each year that details the amount spent by the parent on child care services. Each person should keep a copy of the receipt. All money received by the provider is taxable income to the provider.

For further information about Child Dependent Care Assistance Programs, see IRS Publication 503: Child and Dependent Care Expenses.

Update 

A IRS ruling (Notice 2005-42) now allows employers who set up a dependent care plan for their employees to extend the deadline for reimbursement of child care expenses until March 15th. This means that parents will be given an extra two and a half month grace period to spend money they have set aside for child care expenses for the previous year.

Many employers offer their employees a payroll option that allows them to set aside some of their wages to pay for child care expenses before taxes. These plans are called dependent care plans, flexible benefit plans, or cafeteria plans. Parent-employees who participate in such plans can save more in taxes than if they claim the child care tax credit. Parents decide before the year begins how much to set aside for child care expenses. The maximum amount is $5,000 per family.

Normally if a parent didn't spend all the money that had been set aside by the end of the year, the unspent money would be returned to the employer. It is not unusual for parents to have some money left over at the end of the year. In this case the parent could give the unspent amount to their provider by paying more for care at the end of the year.

Employers must amend their dependent care plan before the end of the year for this new grace period to be in effect for the current year. Employers who don't meet this deadline can decide to amend their plan for the next year.

The new rule makes it much less likely that parents will have unspent money left over.

Providers should still ask parents before the end of the year whether or not they will spend all the money they set aside in these employer plans. Some employers may not meet the deadline to amend their plan and some parents may still not spend all the money set aside by March 15th. In these cases providers should be sure to ask that parents give them any unspent money.

To get unspent money, providers should fill out the same type of receipt they have been using throughout the year. The parent can simply add the unspent money to any bill between now and March 15th.

Photo Credit: Micaela Gump

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