Infinisource Provides Input on Dependent Care Expenses

In May, the IRS published some much-needed guidance on what constitutes a legitimate expense for purposes of Dependent Care Assistance Plans (DCAPs) and the Dependent Care Tax Credit. The current rules have been in place since the Carter Administration.

Due to the fact that many of the clients that Infinisource provides administrative services for sponsor DCAPs, these proposed regulations were of great interest. After an extensive review, Infinisource sent comments to the IRS in order to provide additional clarity. The areas addressed included:

• Short, temporary absences. the IRS requested input on appropriate periods that would constitute a safe harbor for the short, temporary absence exception such that a taxpayer would not have to allocate expenses for that period. Currently, such a determination is based on a vague “facts and circumstances” test. Infinisource recommended a predictable rule that would establish a two-week maximum.

• Room and board of live-in caregiver. The regulations provide that the cost of room and board for a caregiver above usual household expenditures is reimbursable. It is unclear whether this would extend to other expenses like increased utilities. Infinisource requested clarification.

• Spouses at home during the day. Infinisource also pointed out that just because a spouse is home during the day does not mean that dependent care expenses should not be reimbursed. Two examples Infinisource gave were a spouse who is a full-time student pursuing an online degree and a spouse who works a night shift but needs to sleep during the day.

• Sick child centers. The regulations define what constitutes a dependent care center. Infinisource recommended that this definition should include a sick child center for situations when the primary dependent care center refuses to take care of the child because of the illness (i.e., chicken pox or ongoing fever), even though they may provide incidental medical care. Requiring taxpayers to allocate the expenses between their DCAP and a Health Flexible Spending Account would be extremely burdensome.

We can rely on the proposed regulations until finalized. the IRS listed these regulations on its Priority Guidance Plan for the 2006-2007 fiscal year, which starts on October 1, 2006. To review these regulations, visit our website at: www.benefitsolved.com, click on Resource Benefits, scroll down and click on the Federal Regulations PDF. The regulations are on the upper left side under the FSA heading.

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