CLIENT KNOWLEDGE BASE

    Fringe Benefits - Education & Dependent Care

    Two important sections of the Internal Revenue Code (IRC) that you should be aware of are Section 129, which deals with Dependent Care Assistance Programs (DCAPs), and Section 127, which concerns Educational Assistance Programs. 

    These are EXCELLENT fringe benefits you can offer to your employees and in some cases, yourself/family, Tax Free!  Over the past 2 years, we have seen more and more businesses offer these programs given the tax benefits and intangible benefits. 

    Here's an easy-to-understand breakdown of these sections:


    1. 1

      IRC Section 129: Dependent Care Assistance Programs (DCAPs)

      Nature of Tax-Free Benefits:

      • Purpose: DCAPs allow employees to set aside a portion of their earnings on a pre-tax basis to pay for qualifying dependent care expenses. This can include expenses for the care of children under the age of 13, a disabled spouse, or other dependents who are physically or mentally incapable of self-care.
      • Tax Advantage: The key benefit is that amounts paid or incurred by the employer for dependent care assistance under a qualified plan are excluded from the employee's gross income. 
      • Contribution Limits:The amount excluded from an employee's income cannot exceed the lesser of:
        • The total amount of dependent care benefits provided,
        • $5,000 per year ($2,500 if married and filing separately), or
        • The employee's (or if lower, the spouse's) earned income.

      Practical Benefit:

      • By using DCAPs, employees can effectively reduce their taxable income, as the money set aside for dependent care expenses is not subject to federal income tax, Social Security tax, or Medicare tax. In some cases, it's also exempt from state and local taxes.

      Owner and Relative Specifics for DCAPs:

      • Owners and their relatives can participate in the DCAP, but there are specific limits and considerations:
        • Not more than 25 percent of the amounts paid or incurred by the employer for dependent care assistance during the year may be provided for the class of individuals who are shareholders or owners (or their spouses or dependents), each of whom (on any day of the year) owns more than 5 percent of the stock or of the capital or profits interest in the employer.
        • Thus - Owners AND relatives CAN qualify so long as you don't surpass the 25% of the total benefits!
    2. 2

      IRC Section 127: Educational Assistance Programs for Tuition and Student Loans

      Eligibility and Qualification:

      • Businesses can offer Educational Assistance Programs to provide employees with tax-free educational benefits.
      • Student loan payments CAN BE reimbursed up to $5250!
      • These benefits can cover tuition, fees, books, equipment, and supplies, but not lodging, meals, or transportation.

      Owner and Relative Specifics:

      • For owners and relatives, the exclusion from income under an Educational Assistance Program is generally available, but with specific considerations:
        • Not more than 5 percent of the amounts paid or incurred by the employer for educational assistance during the year may be provided for the class of individuals who are shareholders or owners 
        • Thus - owner's and relatives CAN participate, so long as they have other employees that they are contributing to. 

      Contribution and Benefit Limits:

      • The maximum amount excludable from an employee's income under an Educational Assistance Program is $5,250 per year.
      • The program must be a separate written plan of the employer for the exclusive benefit of employees to provide such educational assistance.
    3. 3

      How to Implement:

      For both programs, a written program should be put into place, in accordance with the law.  You can use a service such as CORE DOCS to implement the plan document, or you can write your own, so long as it follows the guidelines AND is distributed to your full company.

      It is also important to relay the implementation of these programs to Gusto or your payroll company.

      Join the dozens of Anomaly clients who have implemented these programs to lower their business taxable income, increase employee retention and happiness!

    If you still have a question, we’re here to help. Contact us