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IRS Issues Guidance on Taxability of DCAP Benefits

On May 10, 2021, the IRS released guidance on the taxability of dependent care assistance programs (DCAPs) for 2021 and 2022, clarifying the amounts attributable to previously issued carryover and extended grace period relief generally are NOT TAXABLE.

Carryovers of unused DCAP amounts typically are not permitted, although a 2 1/2 month grace period is allowed. However, recent coronavirus-related relief allows employers to amend their plans to permit the carryover of unused DCAP amounts to plan years ending in 2021 and 2022, or to extend the permissible grace period to plan years over the same period.

Specifically, if these dependent care benefits would have been excluded from income if used during taxable year 2020 (or 2021, if applicable), these benefits will remain excludible from gross income and are not considered wages of the employee for 2021 and 2022. They will also generally not be taken into account for purposes of applying the exclusion limits of Internal Revenue Code Section 120.

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