According to the law of unintended consequences, decisions and actions always cause unforeseen effects. One of the many unintended consequences of the COVID-19 lockdowns is that many parents and guardians haven’t had to pay nearly as much for daycare in 2020 and 2021 as planned, because they’ve had to keep their young children home.

On its surface, paying less for daycare seems like a good thing — offsetting the inconvenience and burden of having to work at home and care for the children. However, parents and their employers who contributed thousands of dollars to dependent care assistant plans (DCAPs) are understandably concerned and confused about what will happen to that money.

DCAPs have contribution limits, use-it-or-lose-it deadlines, and limits on the amount that can be withdrawn and used each year tax-free. Parents and employers carefully calculate their contributions each year to maximize their tax savings while at the same time avoid the possibility of contributing more than they’ll use and losing the excess.

The COVID-19 lockdowns reduced childcare expenses for many parents, resulting in large excess contributions in DCAP accounts. Luckily, government agencies have provided relief to resolve the issue, but now employers and employees are scrambling to take advantage of the relief and understand the new rules, which is the focus of this week’s post.

Dependent Care Assistant Plan (DCAP) Basics

A DCAP or dependent care flexible spending account (FSA) is an employee benefit plan that provides tax relief to help employees pay for the care of a qualifying dependent. The Internal Revenue Service (IRS) regulations that govern DCAPs (pre-COVID relief) include the following: Continue reading… Continue reading… Continue reading…