Dependent Care Assistance Program (DCAP)
A Dependent Care Assistance Program (DCAP) is an employer-sponsored benefit that allows employees to set aside pre-tax dollars for eligible dependent care expenses. These expenses may include costs for daycare, before- or after-school care, and care for a disabled spouse or dependent.
Employees can contribute a specific amount to this program, which reduces their taxable income, thereby lowering their overall tax liability. For example, if an employee contributes $5,000 to a DCAP and their taxable income is reduced by that amount, they may save on federal and state income taxes, as well as payroll taxes.
The maximum contribution limit for a DCAP is typically set by the IRS and may change annually. It is important for employees to be aware that the funds must be used for qualified expenses incurred during the plan year, and any unused funds may be forfeited (use-it-or-lose-it rule).
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