What Is a Dependent Care Assistance Plan (DCAP)?

A Dependent Care Assistance Plan (DCAP) is an employer-sponsored benefit that allows employees to pay for dependent care services with pre-tax dollars. This arrangement is a type of Flexible Spending Account (FSA), where you decide how much to contribute for the year, and that amount is deducted from your paychecks before taxes are calculated. The purpose of a DCAP is to make dependent care more affordable for employees who must pay for these services to be able to work or look for work.

Eligibility and Qualifying Expenses

To use a Dependent Care Assistance Plan, the expenses must be for a “qualifying individual.” The Internal Revenue Service (IRS) defines this in two ways. The first is a child who has not yet reached the age of 13 and for whom you claim as a dependent. The second category includes a spouse or any other tax dependent who is physically or mentally incapable of self-care and has lived in your home for more than half of the year.

The plan only covers expenses necessary for you, and your spouse if married, to work or actively seek employment. Qualifying expenses include:

• Daycare centers, preschool programs, and before- or after-school care
• Summer day camps
• Care provided by an in-home caregiver, such as a nanny or au pair
• Fees for adult daycare centers

Expenses that do not qualify for reimbursement include:

• The cost of overnight camps
• Tuition for kindergarten and higher grades, which is considered an educational expense
• Long-term care facilities for a dependent who does not live with you for more than half the year
• Payments made to your spouse, the parent of your qualifying child, or your own child who is under the age of 19

Contribution Limits and Tax Implications

The IRS sets annual limits on DCAP contributions. For 2025, the maximum contribution is $5,000 per household for individuals or married couples filing a joint tax return. For married couples who file their taxes separately, the limit is $2,500 each. This limit is per household, not per child, so the $5,000 cap applies whether you have one qualifying dependent or several.

An “earned income limit” also applies. Your total DCAP contribution cannot exceed your own earned income for the year. For married couples, the contribution cannot be more than the earned income of the lower-earning spouse. For example, if one spouse earns $50,000 and the other earns $4,000, the maximum the couple can contribute is $4,000.

The financial benefit of a DCAP comes from its tax advantages. Contributions are deducted from your paycheck before federal income taxes are calculated, which reduces your adjusted gross income (AGI). These contributions also bypass Social Security and Medicare (FICA) taxes. Employers also benefit, as they do not have to pay their share of FICA taxes on the amounts employees contribute.

Information Required for Reimbursement

When filing your taxes, you must report the name, address, and Taxpayer Identification Number (TIN) of your care provider. For a daycare center or business, the TIN will be an Employer Identification Number (EIN). If you hire an individual, you will need their Social Security Number (SSN). An exception exists for care providers that are tax-exempt organizations, where you are not required to provide a TIN but must still report the provider’s name and address.

In addition to provider details, you must have documentation of the expense itself. This means keeping itemized receipts or invoices from your provider. Each receipt must show the specific dates the care was provided, the name of the dependent, a description of the service, and the amount you paid.

The Reimbursement Process

Once you have paid for dependent care and gathered the necessary documentation, you can begin the reimbursement process. Most DCAP administrators offer several ways to submit a claim, such as uploading scanned receipts to an online portal or using a mobile app. Mailing or faxing paper forms may also be an option with some providers.

After you submit a claim, the plan administrator reviews it. This process typically takes between five and ten business days. Once approved, the funds are disbursed to you, usually through direct deposit or a paper check. Some plans may offer a debit card, but DCAP funds are only available for reimbursement after they have been deducted from your paycheck.

The “use-it-or-lose-it” rule applies to FSAs, meaning any money left in your DCAP account at the end of the plan year is forfeited to your employer. Some employers offer a grace period, which gives you an additional two and a half months after the plan year ends to incur new expenses. Other plans may provide a run-out period, a set amount of time after the year ends to submit claims for expenses that occurred during the plan year.

Coordination with the Child and Dependent Care Tax Credit

Using a DCAP has a direct impact on your ability to claim the Child and Dependent Care Tax Credit on your federal income tax return. The IRS does not permit “double-dipping,” which means you cannot use the same care expenses to receive tax-free reimbursement from your DCAP and to calculate a tax credit. The two benefits must be accounted for properly.

Any money you receive from your DCAP reduces the dollar amount of expenses eligible for the tax credit. The tax credit is calculated based on a maximum of $3,000 in expenses for one qualifying individual or $6,000 for two or more. If you receive the maximum $5,000 reimbursement from your DCAP, that amount must be subtracted from your total care costs before you calculate the credit.

This calculation is performed on IRS Form 2441, which you file with your tax return. For example, assume you have two children, incurred $7,000 in daycare costs, and were reimbursed the maximum of $5,000 from your DCAP. When you fill out Form 2441, you subtract the $5,000 DCAP benefit from your $6,000 expense limit for the credit, leaving $1,000 in expenses to apply toward the tax credit calculation.