Parenting during a pandemic is a unique brand of crazy. As working parents with school-age children, we are finding this time of year particularly stressful. School districts around the nation are announcing virtual or hybrid starts to the year, meaning that in many cases, there is no option for full-time in-person education for children in grades K-12. That makes life and work pretty tough for people (like us) with school-age children. Parents with “essential” and “non-essential” jobs alike are being asked to return to physical worksites. Even parents with the ability to keep working from home are getting a bit queasy thinking about another season of navigating 3rd grade Google classroom assignments while simultaneously appearing semi-professional during WebEx meetings. For most parents, the need to work is non-negotiable. We must feed and clothe these little people. Plus, many of us enjoy and have a lot invested in our careers. We’d also like our children to get the education they deserve. What are we to do?
Sadly, this past Spring taught us that eating all the cookies and binge-watching Ozark doesn’t help you meet your professional goals or teach your children long division. It just makes you gain fifteen pounds. So, as employee benefit compliance nerds, we've been thinking about how employers and the federal government might help working parents solve the puzzle.
They’ve already handed us a few pieces. The Families First Coronavirus Response Act created new paid sick and family leave options for many employees of businesses with fewer than 500 workers. Recent federal court action ensures that eligible employees can take that leave intermittently without the need for employer-based permission. However, not every parent qualifies for FFCRA leave, and even those eligible were limited to 12 weeks of leave. Not that anyone’s counting, but it’s been at least 22 weeks since life was even semi-normal.
One of our favorite friends happens to be one of the smartest working mamas we know. She recently pointed out that the existing federal Dependent Care Assistance Program (DCAP) might be another pathway for parents trying to figure out how to pay for additional help. The dependent care tax credit (DCTC) is another option for parents who cannot set DCAP money aside pre-tax through an employer's Section 125 cafeteria plan. Unfortunately, that same friend pointed out that the federal reimbursement rules (which are essentially the same for both programs) are tricky to navigate and might benefit from pandemic-specific modifications.
She had questions about how these rules might (or might not) help solve coronavirus-created parenting conundrums. We’ve parsed through them for her and are sharing our answers with all of you, too, hoping more friends will benefit.
Q1. To make a living, you enrolled your school-age child in a private program (perhaps sponsored by an independent school) to care for them during the day. You also have your child enrolled in a public school virtual program for their actual educational needs. You complete that program with your child at night. Can you use DCAP funds or claim the DCTC to help pay for the private day program?
A1. It depends. IRS Publication 503, which sets the reimbursement rules for both the DCAP and the DCTC, child care program expenses for children ages 5-12, only qualify if they are not primarily for educational purposes and the main reason a child attends is so that parents may work. That doesn’t mean if children between the ages of 5-12 attend a program and learn a new skill while there, it's not an eligible expense. Working parents use summer camps as justifiable DCTC and DCAP expenses all of the time, and children learn plenty at most of those. It also doesn’t mean that children can't read a book while at their private program, even if the book counts towards their virtual public school’s required reading log. That would be considered an incidental educational event. However, you can’t use these programs to offset the cost of sending a child between the ages of 5-12 to a private program where teachers help them with their school-work most of the day. If the purpose is primarily educational, the school program is not a qualified DCAP/DCTC expense. "School" that also serves as child care for children younger than age five does count as an eligible expense, and for non-disabled children 13 and older, generally, no child care expenses count.
Q2. Could you use DCAP or DCTC monies to hire a babysitter or a tutor to help provide you and your child with virtual school assistance while you work?
A2. Again, it depends! If you hire a college student to watch your 10-year-old and ensure he logs into his virtual classroom and submits assignments rather than play Roblox and eat junk food, that’s probably an acceptable DCTC/DCAP expense. If that same babysitter walks your dog or keeps an eye on your 15-year-old and reports back that she seems to be spending a lot of her time taking school "breaks" that involve making Tik Tok dance videos, it's probably still an acceptable child care expense. While dog and teen-tending are valuable services, they are likely incidental. You would have hired the college student to mind your child-gamer anyway. If that college student is an education major, whose primary job is teaching a significant part of the 5th-grade curriculum and tutoring the 15-year-old in Geometry while you earn a living, you made an excellent hire. However, you can’t count your children’s pandemic instructor as a qualified child care expense.
Q3. Is it possible to use DCAP and DCTC funds to reimburse you for joining one of these neighborhood "educational pods" we keep hearing about?
A3. One more time for the people in the back – it depends! If you and your neighbors are hiring a nanny to supervise your communal children aged 5-12 while you work and they are logged in and talking to their teachers and classmates virtually, that's probably a permissible use of funds. However, suppose you and your neighbors hire someone to teach your children while you are at work, rather than merely assist with webcams and Schoology assignment submissions. In that case, the IRS will likely consider it to be an impermissible expense.
Q4. If parents are teleworking at home, can you legitimately claim a DCTC or use DCAP money to pay a nanny to keep your child focused on their Zoom-based teacher, rather than interrupting your Zoom-based employee review?
A4. Yes! As long as your Nanny isn’t primarily teaching your kids. As long as the nanny is just ensuring the general well-being of at least one child under age 13 while you work, the IRS doesn’t care that your “office” is now an IKEA desk you shoved into your walk-in closet.
Q5. What if you have one working parent at home and one is not working, either because they lost their job due to COVID-19 or for some other reason. Could you use DCAP money to pay a babysitter to help provide coverage while you work or claim a DCTC to cover those expenses?
A5. Childcare expenses for children under age 13 incurred to allow parents to work or seek work are qualified expenses. If one parent is working (either in a professional office or at the dining room table) and the other parent is sending out resumes and having Zoom interviews in the basement, the IRS agrees that you need babysitting and tax relief to help pay for it. If one parent is working and the other is not actively seeking work, you definitely need a babysitter on occasion. Self-care and adults-only time are both essential. It's not healthy for anyone if you are with the little people all of the time! Unfortunately, the federal government doesn't feel strongly enough about your mental health to subsidize your babysitting costs.
Q6. Could you use DCAP funds or claim a DCTC to pay for care to help a child aged 13 and older with special needs navigate virtual school and life at home while you are working through the pandemic?
A6. It depends, but in most cases, probably not. This answer pains us, because we have personal experience navigating virtual school with neurodiverse children who have learning differences. It is TOUGH, and all parents in this situation need and deserve help, and all kinds of support, no matter what their work situation may be. Unfortunately, right now, to claim a tax-preferred eligible care expense for a child older than 12, the IRS says you child must be a person who "can't dress, clean, or feed themselves because of physical or mental problems…Also, persons who must have constant attention to prevent them from injuring themselves or others are considered not able to care for themselves." If your child meets this level of disability, then your care expenses may qualify. Alternatively, suppose you've hired a qualified childcare provider to supervise younger children primarily, and that person incidentally provides you with some care for an older special needs child. In that case, the expense will also likely count. What we truly need, though, is for the IRS to provide an exception that allows parents of special needs children to have "care" to be gainfully employed during the national emergency, regardless of the age of the children.
Q7. Could an employee elect to participate for the first time in a DCAP, or increase their election for a DCAP, due to the COVID-19 pandemic for child care expenses related to in-person care or supervision of a child that is concurrent with virtual learning?
A7. Possibly. While DCAP elections made during the annual open enrollment period are generally irrevocable for the year, the IRS does allow exceptions. If the employer's Section 125 plan document permits it, the IRS says that employees may, in any year, increase or decrease an existing DCAP election because (1) their daycare provider changed; (2) the cost of care changes (unless the provider is a relative); or (3) the need for care changes due to a job change or change of work hours. We don't give tax advice through this blog, but we think most parents working through COVID-19 who already elected to participate in a DCAP in 2020 could make the case that their need for care or cost of care changed significantly. Beyond that, the IRS also issued COVID-19 specific DCAP enrollment relief through Notice 2020-29. Employers can, at their discretion, allow employees to revoke a dependent care election, make a new election, or decrease or increase an existing election on a prospective basis during the calendar year 2020. So, where employers choose to allow it, there are even more opportunities to make a DCAP change in 2020.
Q8. Is it possible for an employer to contribute to an employee’s DCAP account to help offset increased child care costs caused by COVID-19?
A8. Possibly. According to the IRS, an employee can generally exclude from gross income up to $5,000 in DCAP funds each year ($2500 for married parents filing separately). The $5000 limit stands no matter who makes the contribution--employer or employee. If an employee only set aside $1000 this year in a DCAP, the employer could verify the employee’s tax status and contribute up to a maximum of $4000, depending on circumstances. However, an employer can’t just help out certain employees, even if some really need extra help during this time. Companies must treat similarly situated employees consistently when it comes to employee benefits. DCAPs are also subject to nondiscrimination requirements outlined in Section 129 of the Internal Revenue Code. To pass nondiscrimination testing, an employer cannot favor highly compensated employees when it comes to DCAP participation and contributions.
We hope you find these Q&As helpful friends. We want to lift up our fellow working parents, now more than ever. We wish that the federal government was doing more to lift us all up too, but maybe the reason we are all going through this is to inspire future change? Maybe? Fingers crossed!