IRS Proposes Regulations for DCAP Nondiscrimination Testing Purposes

The IRS has recently released proposed regulations to offer guidance on how employers offering dependent care assistance programs can satisfy applicable nondiscrimination tests. The 55% average benefits test requires that the average benefits provided to non-highly-compensated employees be at least 55% of the average benefit for highly-compensated employees. Three testing options have historically been available: (1) divide the total benefits paid by the number of all employees in each group (highly-compensated or non-highly-compensated), (2) divide the total benefits by the number of all eligible employees in each group or (3) divide the total benefits by the number of employees who actually participate in the DCAP. The IRS has endorsed the third option, which should make it easier for employers to comply with their nondiscrimination obligations. For more information on the rules governing DCAPs, visit Tax Facts Online. Read More: Link to Q8892.