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5500 Preparer's Manual for 2012 Plan Years
The premier resource in the field of Form 5500 preparation, 5500 Preparer's Manual will help you handle the required annual Form 5500 filings for both pension benefits and welfare benefit plans.
From Spencer's Benefits Reports: The Internal Revenue Service has issued final regulations updating and clarifying provisions of the IRC Sec. 21 tax credit for expenses for household and dependent care services necessary for gainful employment. These rules, which were published in the August 14 Federal Register, affect how employers can provide dependent care benefits.
The regulations reflect statutory amendments made by the Deficit Reduction Act of 1984, the Tax Reform Act of 1986, the Omnibus Budget Reconciliation Act of 1987, the Family Support Act of 1988, the Small Business Job Protection Act of 1996, the Economic Growth and Tax Relief Reconciliation Act of 2001, the Job Creation and Worker Assistance Act of 2002, the Working Families Tax Relief Act of 2004 (which revised the definition of dependent), and the Gulf Opportunity Zone Act of 2005. The final regulations are effective August 14.
Under the rules, household and dependent care expenses must be for periods during which the taxpayer is gainfully employed or is in active search of gainful employment. A spouse who is incapacitated or a full-time student also is deemed to have earned income of $250 per month ($500 if both spouses qualify). During each of five calendar months during the taxable year, full-time student status must be in a qualified educational institution that does not merely provide education online.
The rules also require taxpayers to allocate the cost of care on a daily basis if expenses are paid for a period during only part of which the taxpayer is employed or in active search of gainful employment. An exception to this allocation requirement is provided for a short, temporary absence from work, but only for those costs that the taxpayer is required to pay during the absence. An absence for leave under the Family and Medical Leave Act, short or long term disability, or paid medical or maternity leave is not a creditable short, temporary absence, but an absence of no more than two consecutive calendar weeks is.
A taxpayer may take expenses into account under Sec. 21 only in the later of (1) the taxable year in which the services are performed or (2) the taxable year in which the expenses are paid. The regulations also provide that the status of an individual as a qualifying individual is determined on a daily basis; that a taxpayer may take into account only expenses that qualify before a disqualifying event, such as a child attaining age 13. The limits that may be claimed continue to be $3,000 for one qualified child and $6,000 for two or more children.
The determination of whether expenses qualify as employment-related expenses, including whether an individual is a qualifying individual, can be made only at the time services are performed. Only expenses for the care of a qualifying individual that are for the purpose of enabling the taxpayer to be gainfully employed or a full-time student qualify for the credit.
Services must be performed prior to a disqualifying event and at a time when the purpose is to enable the taxpayer to be gainfully employed or to attend school full-time. For purposes of determining whether expenses are employment-related expenses, the time of payment is irrelevant, although payment must be made before the credit is claimed. In addition, the primary purpose of expenses for the care of a qualifying individual must be to assure that individual’s well-being and protection.
Expenses for a child in nursery school, preschool, or similar programs for children below the kindergarten level are for the care of a qualifying individual and may be employment-related expenses. However, expenses for a child in kindergarten or a higher grade are not for care and therefore are not employment-related expenses, because kindergarten is considered an educational program. Expenses for before- or after-school care of a child in kindergarten or a higher grade may be for care. Commentators had suggested that working parents ought to be able to claim at least a portion of the cost of a full-day kindergarten, but the IRS decided that, to make administration easier, it would retain the exclusion of kindergarten expenses.
Instead, a parent whose child attends a half-day kindergarten may claim the credit for the cost of a morning or afternoon before- or after-school program. However, a parent whose child attends a full-day private kindergarten may not claim the credit for the cost of services performed in the afternoon, because the services are part of the kindergarten educational program and not before- or after-school care. Although nursery school and other programs below the level of kindergarten also may include significant educational elements, for administrative convenience, the regulations treat these programs as for care.
Specialty camp. A taxpayer also may claim the full amount paid for a day camp or similar program even though the camp specializes in a particular activity, such as soccer or computers. Expenses for summer school and tutoring programs do not qualify for the Sec. 21.tax credit. Day camps that meet the definition of dependent care center also must comply with the state and local government laws that apply to such centers.
Sick child centers. Expenses for care provided at a sick child center may be claimed either as medical expenses under IRC Sec. 213 or as a Sec. 21 dependent care credit, but not both, depending on whether the care assures a child’s well-being and protection or constitutes medical care, and must be determined on a case-by-case basis.
Room and board. With respect to boarding school expenses, the IRS requires the taxpayer to separate expenses for the creditable care of a qualifying individual and expenses for other goods or services, such as for education, meals, and housing, which are not claimable dependent care expenses. The additional cost, over usual household expenses, of providing room and board for a caregiver may be an employment-related expense. The IRS cites as an example the additional cost to the taxpayer of rent for an apartment with an additional bedroom to accommodate the caregiver/housekeeper and additional utilities attributable to the caregiver/housekeeper.
Night care. The final regulations specify that expenses may be employment-related creditable expenses if one parent works during the day and the other parent works at night, and the expenses are for care while one parent is working and the other is sleeping. Also creditable expenses are those for overnight care when a parent works at night.
Changed definition of dependent. Finally, the regulations clarify that the special dependency rule of IRC Sec. 21(e)(5) applies to children of parents who live apart at all times during the last six months of the calendar year, as well as to the children of separated or divorced parents. The regulations also reflect the changes made to the definitions of qualifying individual and custodial parent by the Gulf Opportunity Zone Act of 2005. The regulations also clarify that, for taxable years beginning after Dec. 31, 2004, costs for care outside the taxpayer’s household of a qualifying individual who is a dependent or spouse incapable of self-care who regularly spends at least eight hours each day in the taxpayer’s household may continue to qualify for the dependent care credit.
For further information, contact Amy Pfalzgraf at (202) 622-4960.
For more information on this and related topics, consult the CCH Pension Plan Guide, CCH Employee Benefits Management, and Spencer's Benefits Reports.
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