IRS Issues Guidance on Taxability of DCAP Benefits for 2021 and 2022
On May 10, 2021, the Internal Revenue Service (IRS) released guidance >> on 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 care benefits would have been excluded from income if used during taxable year 2020 (or 2021, if applicable), these benefits will remain excludible from gross income and are not considered wages of the employee 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.
Here is an Example
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.
Here are the Facts
Employee elects to contribute $5,000 for DCAP benefits for the 2020 plan year but incurs no dependent care expenses during that plan year. The employer amends its plan to allow the employee to carry over the unused $5,000 of DCAP benefits to the 2021 plan year. The employee elects to contribute $10,500 for DCAP benefits for the 2021 plan year, incurs $15,500 in dependent care expenses for that plan year, and is reimbursed $15,500 by the DCAP.
In Conclusion
The $15,500 is excluded from the employee’s gross income and wages because $10,500 is excluded as 2021 benefits and the remaining $5,000 is attributable to a carryover permitted by the previously issued coronavirus-related relief.
IRS FAQs on COBRA Subsidies
The Internal Revenue Service (IRS) has published frequently asked questions (FAQs) on the application of the American Rescue Plan Act (ARP) subsidies for continuation health coverage under the Consolidated Omnibus Budget Reconciliation Act of 1985 (COBRA). The FAQs cover a wide range of topics.
Background
The ARP subsidy covers 100% of COBRA and State mini-COBRA premiums from April 1–Sept. 30, 2021, for certain Assistance Eligible Individuals whose work hours were reduced or whose employment was involuntarily terminated. The subsidy is funded via a tax credit provided to employers, insurers or group health plans, according to the terms of the statute.
Frequently Asked Questions
Among the topics covered are how to calculate and claim the tax credit, including when a third-party payer is involved. According to the guidance, employers must document individuals’ eligibility for COBRA premium assistance to claim the credit. The FAQs further clarify that:
- The subsidy is available for extended periods of COBRA coverage between April 1 and Sept. 30, 2021, due to a disability, second qualifying event or extension under State mini-COBRA.
- Involuntary termination includes constructive discharge and termination for cause, but not gross misconduct.
- Health reimbursement arrangements, dental-only plans and vision-only plans are covered by the subsidy.
Action Steps
Employers should review the IRS FAQs in their entirety to ensure compliance with the ARP, especially with respect to notice and documentation obligations.
IRS Releases Updated Form 720 for PCOR Fees
The IRS has released a revision to IRS Form 720, which is used to pay the Patient-Centered Outcomes Research (PCOR) fees due July 31, 2021.
Each year, employers must wait for the IRS to update Form 720 to pay their PCOR fees using the correct form. The PCOR fee is used to fund research on patient outcomes. As part of the Affordable Care Act, employer-sponsored health plan(s) are subject to PCOR fees.
The PCOR Fees due by July 31, 2021 include plan years ending in 2020.
- For plan years ending on or after January 1, 2020 through September 30, 2020 the fee is $2.54 per covered life.
- For plan years ending on or after October 1, 2020 through December 31, 2020 (including calendar year plans) the fee is $2.66 per covered life.
Protecting Employees From Burnout
Burnout has been a commonly discussed issue amid the COVID-19 pandemic. Oftentimes, it is the Human Resources department's responsibility to help employees cope with burnout and its contributing factors.
Burnout, in simple terms, is the feeling of mental exhaustion stemming from workplace duties. According to the World Health Organization, burnout may be shown through the following symptoms:
- Fatigue or energy depletion
- Decreased engagement at work, or feelings of negativism or cynicism related to one's job
- Reduced productivity or efficacy
- As these examples show, burnout doesn’t always look the same for everyone. Yet, the impacts of burnout are typically uniform—lower-quality work and detrimental health effects.
4 Steps You Can Take to Help Your Team Recover From or Avoid Burnout Altogether
- Meet regularly with team members and peers to gauge their emotional states and discuss individual work duties as needed.
- Recognize and celebrate individual and team achievements.
- Train other managers on how to keep employees engaged and motivated at work, and how to spot signs of burnout.
- Clearly communicate that employees should reach out if they are experiencing burnout, and that there will be no punishment for seeking help.
Your team is made up of many unique individuals, each with different needs that should be met in order to recover from or avoid burnout. Consider what actions you can take as a team leader and mentor to meet their diverse needs and build up a supportive and productive workplace culture.
Keep Employees Connected & Encourage Healthy Habits with Forsite EXP >>
Forsite EXP is the ultimate employee experience platform. This customizable app helps employers reach employees on their smartphone with important company updates and healthcare education, and provides benefits support as they navigate unique healthcare needs.
Hiring and Managing Seasonal Employees
With the summer hiring season underway, employers should begin thinking about how best to hire and manage seasonal employees. Employers who do not dedicate time to these critical steps risk having to face disgruntled employees, unhappy customers, and even legal violations.
To learn some best practices for hiring and managing seasonal employees, please watch this video >>>.
Read May's HR newsletter >> for 4 virtual recruitment strategies.
The content herein is provided for general information purposes only, and does not constitute legal, tax, or other advice or opinions on any matters. This information has been taken from sources which we believe to be reliable, but there is no guarantee as to its accuracy.
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