Many people work to provide for their families. However, they may need to pay for child or elder care while at work, and the high costs of these services can contribute to financial stress. Employers can help their workers by offering dependent care assistance plans as part of their employee benefits package.
Dependent Care Expenses May Become a Financial Burden
Many employees have young children. They may also have elderly parents or other relatives who depend on them. In some cases, employees may be forced out of the workforce or into part-time work because they cannot afford to pay for care and have no option but to stay at home to provide this care themselves. Even for those who can afford care, these expenses may still be a significant financial burden.
According to the Family Caregiver Alliance more than one in six American workers provide care for an elderly or disabled family member, relative or friend, and 70 percent of these working caregivers experience work-related difficulties as a result. Caregivers may need to reduce their hours, take a leave of absence or even quit their jobs. Others might struggle to manage the financial impact of care expenses on their household budget.
Working parents often face similar challenges. According to the U.S. Census Bureau, the number of businesses offering child care services dropped between the years 2020 and 2021, while the cost of child care increased. Average prices vary based on factors like location and the child’s age, but the average cost of home-based child care for a school-aged child in a small county is $4,810 a year, while the average cost for an infant in center-based care in a large county is $15,417. These inflated expenses may cause employees to consider if it makes financial sense for them to stay home to provide child care themselves.
What is a dependent care assistance program?
A dependent care assistance plan or program (DCAP) is a type of employee benefit designed to help workers pay for care for their qualifying dependents. It is sometimes called a dependent care flexible spending account, but it differs from typical health Flexible Spending Accounts (FSAs) in both purpose and regulation.
According to the Internal Revenue Service (IRS), dependent care assistance programs must be used for a qualifying person’s care and can only be used for expenses that allow the employee to work or look for work.
- Eligible employees include any common-law employee of the employer. Self-employed individuals can also participate and receive available employer contributions, but only W-2 employees can also make their own pre-tax elections.
- Qualifying dependents include children under 13 and spouses or other older dependents unable to care for themselves.
When a worker meets the above conditions, employers may exclude up to $5,000 in DCAP benefits from their gross income each year. For employees who are married and filing separately, the maximum exclusion is $2,500. However, there are restrictions to this based on the employee’s or their spouse’s income and the employee’s status as a highly compensated employee. Your employee benefits broker should be able to provide regulatory compliance assistance to help ensure that your DCAP benefits meet all relevant requirements.
Advantages and Disadvantages of Offering DCAPs to Employees
These are some of the advantages of offering a dependent care assistance plan:
- Since employees do not pay taxes on funds set aside for dependent care expenses under a DCAP, offering this program could help reduce the employee’s tax burden and maximize the value of their total compensation package.
- DCAPs can support the retention of working caregivers. Employees may feel a greater sense of loyalty to a company that helps cover the costs of caring for their dependents. Financial support can also help employees who can afford care but face significant financial stress due to these expenses. For other workers, DCAPS may offer the assistance needed to prevent them from quitting their jobs in order to stay at home and provide care.
Although offering a dependent care assistance plan can have several pros, it also has its disadvantages:
- DCAPs may not appeal to all employees. Employees who pay for care for dependents will likely be happy with DCAP benefits. However, these benefits won’t appeal to employees who don’t have dependents requiring care or who have a non-working partner who provides care. Other employees may not be eligible if they pay for care for someone who does not meet the IRS definition of a dependent.
- DCAP benefits may not fully cover care costs. In areas where care is particularly expensive, the maximum amount for DCAP funds may not be enough to cover the entire cost of care.
Alternatives to Dependent Care Assistance Plans
Dependent care assistance plans are one way to support employees with dependents. However, there are also other benefits and perks employers can consider, either in combination with DCAPs or in place of them. These include:
- Onsite child care centers. An onsite child care facility can be a practical option for working parents. By offering an on-site daycare, employers can eliminate the problems associated with commuting to the center for drop-off and pickup. However, there are liability issues to consider. And, depending on the size of the company, this option may not be possible or practical.
- Flexible and remote work options. Working in the office on a rigid 9-to-5 schedule can be challenging when you’re juggling child or elder care. A flexible schedule that allows for remote or hybrid work and adjustable start and end times can help workers balance their personal and professional obligations. Workplace flexibility may also appeal to workers who don’t have dependents but want time for other personal reasons or educational pursuits. However, flexibility may be impractical for certain roles, especially those requiring customer interaction at specific times.
- Lifestyle Spending Accounts (LSAs). LSAs are after-tax, employer-funded accounts that can be used to help reimburse employees for common yet costly expenses incurred during ordinary life. These could include expenses related to child care, elder care or even pet care.
Creating Your Employee Benefits Package
Is your employee benefits package doing enough to support working parents and caregivers? A dependent care assistance plan may be a good addition to your benefit offerings. Higginbotham can help you craft an employee benefits package that supports employee engagement and retention. Talk to one of our experienced benefits specialists today.
