26 U.S.C. § 129 — Dependent care assistance programs

(a) Exclusion. (1) In general — money an employer pays for an employee's dependent care assistance isn't counted in the employee's gross income, as long as it's given through a program described in subsection (d). (2) Limit on the exclusion. (A) In general — the amount excluded for a tax year can't be more than $7,500 ($3,750 if married filing separately). (B) Year of inclusion — any amount over that limit gets added to gross income in the year the dependent care was actually provided, even if the employer pays for it in a later year. (C) Marital status — marital status for this rule follows section 21(e)(3) and (4). (D) Special rule for 2021 — for tax years starting after December 31, 2020, and before January 1, 2022, the limit was $10,500 (or half that for separate returns) instead of the normal amount. (b) Earned income limit. (1) The amount excluded can't be more than: (A) the employee's own earned income for the year, if unmarried at year-end; or (B) if married at year-end, the smaller of the employee's earned income or the spouse's earned income. (2) Special rule for certain spouses — when figuring a spouse's earned income under this rule, section 21(d)(2) applies if the spouse is a student or can't care for themselves. (c) Payments to related individuals. None of this exclusion applies to money paid to someone who: (1) the employee or their spouse can claim as a dependent under section 151(c); or (2) is the employee's child (as section 152(f)(1) defines it) under age 19 at year-end. (d) Dependent care assistance program. (1) In general — this is a separate written plan an employer sets up just for its employees, offering dependent care assistance, that meets requirements (2) through (8) below. If a plan would qualify except that it fails one of these requirements, it still counts as a qualifying program for employees who aren't highly compensated. (2) Discrimination — the plan can't favor highly compensated employees (as section 414(q) defines them) or their dependents. (3) Eligibility — the plan must cover employees under a classification the employer sets up that the Secretary finds isn't unfairly tilted toward highly compensated employees or their dependents. (4) Owners — no more than 25 percent of what the employer spends on dependent care assistance in a year can go to people (or their spouses/dependents) who each own more than 5 percent of the company's stock or profits. (5) No funding required — the plan doesn't have to be pre-funded. (6) Notice — eligible employees must get reasonable notice of the plan and its terms. (7) Statement of expenses — by January 31 each year, the plan must give each employee a written statement of what the employer paid or spent on their dependent care the previous year. (8) Benefits test. (A) In general — a plan passes this test if the average benefit for non-highly-compensated employees is at least 55 percent of the average benefit for highly compensated employees, across all the employer's plans. (B) Salary reduction agreements — when applying that test to benefits funded through salary reduction, the plan can ignore employees earning less than $25,000 (as section 414(q)(4) defines compensation, unless the employer picks a different, nondiscriminatory way to measure it). (9) Excluded employees — when checking eligibility (3) and the benefits test (8), the plan can leave out: (A) employees under 21 who haven't completed a year of service (as section 410(a)(3) defines it), following rules like those in section 410(b)(4); and (B) employees covered by a genuine collective bargaining agreement where dependent care benefits were actually negotiated in good faith, as long as they aren't otherwise included in the plan. (e) Definitions and special rules. (1) "Dependent care assistance" means paying for or providing the kind of services that would count as employment-related expenses under section 21(b)(2) if the employee paid for them. (2) "Earned income" has the meaning in section 32(c)(2), but doesn't include the dependent care assistance itself. (3) "Employee" includes, for any year, someone who counts as an employee under section 401(c)(1) (self-employed individuals). (4) "Employer" — someone who owns an entire unincorporated business is treated as their own employer; a partnership is treated as the employer of each partner who counts as an employee under (3). (5) Attribution rules. (A) Stock ownership is figured under section 1563(d) and (e) (but ignoring section 1563(e)(3)(C)). (B) An interest in an unincorporated business is figured under Treasury regulations based on similar principles. (6) Utilization test not applicable — a program won't be disqualified under subsection (d) (except paragraphs (4) and (8)) just because of how much employees actually use the different types of assistance offered. (7) No double benefit — an employee can't also claim a deduction or credit elsewhere for amounts excluded under this section. (8) Onsite facilities — for care provided at an employer's own onsite facility, the excluded amount is based on (A) how much the employee's dependent actually uses the facility, and (B) the value of the services the dependent gets. (9) Provider information required — no amount can be excluded unless the employee's tax return includes the care provider's name, address, and taxpayer ID number, or, if the provider is a tax-exempt 501(c)(3) organization, its name and address. If that information is missing, the exclusion can still apply if the employee shows they used due diligence trying to get and provide it.