From: Benefits
Transcript:
Legal Update
IRS Issues Guidance On Taxability of DCAP Benefits for 2021 and 2022. On Mat 10, 2021, the IRS addressed the taxability of dependent care assistance programs (DCAPs) for 2021 and 2022, clarifying that amounts attributable to previously issued carryover and extended grace period relief generally are not taxable.
Specifically, if these dependent are benefits would have been excluded from income if used during taxable years 2020 or 2021, these benefits will remain excludible and are not considered employee wages 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 129.
IRS Notice 2021-26 clarifies the interaction of this standard with the one-year increase in the exclusion for employer-provided dependent care benefits from $5,000 to $10,500 for the 2021 taxable year under the American Rescue Plan Act.
Employers should review the examples in IRS Notice 2021-26 to familiarize themselves with the possible tax consequences of incorporating all of the previously issued relief.
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