Joint Committee on Taxation Publishes a Report on Present Law and Background on Dependent Care and Paid Leave
On April 19, 2021, the Joint Committee on Taxation released its Present Law and Background on Dependent Care and Paid Leave in preparation for the April 21, 2021, public hearing held by the House Committee on Ways and Means. The report describes the legal background, empirical data and policy considerations related to topics considered in the hearing which include, among other topics, various federal tax rules related to employer-provided dependent care assistance programs (DCAPs) and paid family and medical leave.
The report provides a detailed summary on the legal background of DCAPs (including recent temporary provisions related to COVID-19). Highlights of the overview are included below.
- The excludable amount from an employee’s gross income is generally limited to $5,000 ($2,500 in the case of married individuals filing separately). Temporary relief provided by the American Rescue Plan Act of 2021 (ARPA) permits an increase in the excludable amount to $10,500 ($5,250 in the case of married individuals filing separately) for calendar year 2021 only.
- DCAPs permit an employer to allow a spend-down provision. This means that participants who have ceased participation in a DCAP can apply remaining unused amounts to expenses incurred through the last day of that plan year (including any grace period).
- Generally, a DCAP is not permitted to allow a carryover. However, the special rules for plan years ending 2020 and 2021 related to COVID-19 permit unused balances to be carried over into the subsequent plan year, as provided by the Consolidated Appropriations Act of 2021 (CAA). In addition, a DCAP may extend the grace period applicable to DCAPs to 12 months after the end of the plan year for plan years ending in 2020 and 2021 per the CAA.
- The CAA modified the definition of qualifying individual to include a dependent who has not yet reached the age 14 (normally the cutoff is age 13). This applies to employees enrolled in a DCAP for the plan year for which the end of the enrollment period was on or before January 31, 2020 (including any grace period).
- For plan years ending in 2021, an employer can choose to permit employees to make prospective DCAP election changes.
DCAP amounts are reported on the employee’s Form W-2, Wage and Tax Statement, Box 10, for the taxable year in which the dependent care services were provided.
Paid Family and Medical Leave
The report also elaborates on the employer credit for paid family and medical leave. Employers who provide family and medical leave to their employees may complete Form 8994 to claim a credit. To claim the leave, employers must have a written policy that provides at least two weeks of paid leave to full-time employees (prorated for part-time employees), and the paid leave must be at least 50% of the wages normally paid to the employee. Family and medical leave, for purposes of this credit, is leave granted by the employer in accordance with written policy for one or more of the following reasons:
- Birth of an employee’s child and to care for the child
- Placement of a child with the employee for adoption or foster care
- To care for the employee’s spouse, child or parent who has a serious health condition
- A serious health condition that makes the employee unable to do the functions of their position
- Any qualifying exigency due to an employee’s spouse, child or parent being on covered active duty (or having been notified of an impending call or order to covered active duty) in the US armed forces
- To care for a service member who’s the employee’s spouse, child, parent or next of kin
The credit is a percentage of the amount of wages paid to a qualifying employee while on family and medical leave for up to 12 weeks per taxable year. The applicable percentage falls within a range from 12.5% to 25%. An employer can claim credit only for leave taken after the written policy is in place, and the credit is now scheduled to expire December 31, 2025.
Notably, this tax credit is different than the COVID-19-related tax credits for paid leave provided via the FFCRA, CAA and ARPA. The temporary COVID-19 guidance provides that certain employers who pay sick or family leave wages for specified reasons can receive a corresponding payroll tax credit. Under the FFCRA, the paid leave provisions were effective from April 1, 2020, through December 30, 2020 (and required for certain employers); the CAA permitted employers to choose to extend such leave through March 31, 2021; and the ARPA once again extended the leave through September 30, 2021 (also optional for employers). If employers choose to provide this paid leave in 2021, they are eligible for the associated payroll tax credits.
ARPA further provided an additional 80 hours of emergency paid sick leave (EPSL); increased the amount of expanded FMLA (EFMLA) to $12,000 (was $10,000); permits the time it takes to receive or recover from the COVID-19 vaccination as a qualifying reason for EPSL; and all the qualifying reasons for EPSL are now permitted for EFMLA.
Finally, policy considerations regarding employer-provided family and medical leave are discussed – including different leave options such as a public option, through the workplace via employer mandates and providing employer incentives – and the impact to tax efficiencies of each option. The report also includes data on the percentage of certain workforces that have access to different types of leave. Paid leave continues to be a benefit that policymakers are considering for employees.
While this is not new guidance, the report serves as a good reminder of rules and temporary relief provisions applicable to DCAPs and paid family and medical leave.
Present Law and Background on Dependent Care and Paid Leave »