Balancing work and family responsibilities isn’t easy, especially for employees caring for young children or dependent family members. As an employer, you can play a powerful role in easing that strain while strengthening your own team’s engagement and retention. One of the most effective (and often overlooked) tools to do just that is a Dependent Care Assistance Program (DCAP). 

 

What Exactly Is a DCAP? 

 

A DCAP is a formal benefit plan that allows employers to pay for, or reimburse, an employee’s dependent-care expenses using pre-tax dollars. This allows employees to save on income and payroll taxes, while employers enjoy a more stable, productive workforce. 

 

Beginning in 2026, the maximum amount employees can exclude from their taxable income for dependent-care benefits is $7,500 per year ($3,750 if married filing separately). The amount that may be excluded is also limited to the employee’s earned income if single, or if married the lesser of the employee’s or the spouse’s earned income for the year. If a spouse doesn’t work because they’re a full-time student or incapable of self-care, special rules apply that deem a minimum level of earned income for them ($250 per month for one qualifying person, $500 for two or more).  

 

Anything beyond those limits becomes taxable wages, but most families will find the exclusion generous enough to cover a significant portion of daycare or elder-care costs.

 

What Counts as Eligible Care 

 

To qualify, the expenses must be employment related. This means they’re necessary for the employee (and spouse, if married) to work or look for work. That includes daycare, preschool, summer day camps, or in-home care for: 

• A child under 13, or 
• A spouse or dependent who’s physically or mentally incapable of self-care and lives with the employee more than half the year. 

 

Payments to the employee’s own child under 19, or to anyone the employee can claim as a dependent, don’t qualify. 

 

What Employers Must Do 

 

Setting up a DCAP takes more than good intentions, it requires structure and compliance. Here’s what that looks like in practice: 

 

1. Adopt a Written Plan. 

The program must be in writing and exist solely for employees’ benefit. It can be funded or unfunded. Many employers operate on a simple reimbursement basis. 

 

2. Avoid Favoring Executives. 

IRS rules prohibit discrimination in favor of highly compensated employees. That means eligibility, benefits, and contributions must be fair across the board. No more than 25% of total benefits can go to 5% plus owners or their family members. 

 

3. Keep Employees Informed. 

You must provide reasonable notification of the plan’s availability and its terms. Think of this like your FSA or health-plan communication. 

 

4. Handle Reporting and Documentation. 

Employers must report each employee’s DCAP benefits in Box 10 of Form W-2 and issue a written statement of the amounts paid by January 31 each year. 

Employees, in turn, must list their care provider’s name, address, and taxpayer identification number on their own tax return. 

 

Why It’s Worth It 

 

Offering dependent care benefits isn’t just a box to check, it’s a strategic investment in your people and your business. 

• Recruitment & Retention: In a tight labor market, benefits that genuinely make life easier for working parents and caregivers stand out. 
• Reduced Absenteeism: Employees with dependable childcare are more consistent and focused. 
• Tax Savings: Because contributions are excluded from wages, employers reduce payroll tax obligations, which is a real win-win. 
• Culture of Support: Demonstrating care for employees’ families enhances loyalty, morale, and your firm’s reputation as a place where work-life balance is more than a slogan. 

 

A well-designed DCAP is more than an HR perk, it’s a smart business move. It signals that you understand what your employees are juggling, and you’re willing to step up with meaningful support. 

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If you’re considering adding or updating a dependent-care program, it’s a good idea to review your plan structure, confirm compliance with IRS nondiscrimination rules, and ensure your payroll and reporting systems are ready for the 2026 changes. Your Faw Casson advisor can help employers turn complex tax rules into simple, actionable strategies that work for their teams and their bottom line.