SANTA CRUZ COUNTY
PERSONNEL ADMINISTRATIVE MANUAL

PURPOSE:

To provide for a dependent care reimbursement plan for County employees as provided for under Internal Revenue Service regulations.


LEGAL BASIS:

Internal Revenue Code Section 129; Santa Cruz County Dependent Care Reimbursement Program

POLICY:

1. INTRODUCTION
   
   There are two provisions under the Internal Revenue Code (and conforming State law) to assist employees, while working, with expenses for child care and/or care of disabled dependents. One of these is a child and dependent care tax credit, which is taken on an employee's federal (but not California) income tax returns. The other is an employer established dependent care assistance program. Under Internal Revenue Code Section 129, the County has created such a dependent care assistance program ("D-Care Plan") in an effort to assist employees to obtain needed child/dependent care and to take advantage of available tax benefits.
   
   A summary of the D-Care Plan is provided immediately below. This is followed by a summary of the common elements of, and differences between, the tax credit and the D-Care Plan. Next there are a series of questions and answers in an attempt to address your concerns, including information on how to estimate your contributions to the D-Care Plan. Lastly, there is information on how you can estimate your savings using the tax credit versus the D-Care Plan. It is very important that you estimate your own potential savings under each provision before you decide on enrolling in the D-Care Plan, rather than relying on the attached examples. It is recommended that you consult a tax specialist if you have any questions. 
   
   The last page of this packet is an ENROLLMENT FORM (PER1525) for the D-Care Plan. Completed enrollment forms MUST be received in the Auditor/Payroll Department by 5:00 p.m. on the last day of the open enrollment period. You may NOT enroll in the plan at a later time in the tax year unless certain specific "qualifying events" occur.
   
   
2. "D-CARE PLAN" OVERVIEW 
   
   
   1. Both single and married employees may be eligible for benefits under a D-Care Plan. However, married employees are generally not eligible unless the employee's spouse is also working, or is 
      a full-time student or is physically or mentally unable to care for him/herself.
      
      
   2. A qualified dependent is your spouse or a person you claim as a dependent on your federal income tax return who resides in a home you (and your spouse, if married) maintain, and who is: your child under age 13; or another dependent (such as a child over age 13, a parent or a spouse) who is unable to care for him/herself because or physical or mental disability.
      
      
   3. Your expenses must be for a qualified dependent care provider.
      
      
   4. The D-Care Plan permits County employees to identify up to $5,000 a tax year from dependent care, and to reduce their gross taxable income a like amount for federal and state income purposes and for Social Security (OASDI or FICA) contributions. (Individuals who are married by filing separate tax returns may not put more than $2,500 a tax year into a D-Care Plan.)
      
      
   5. Current employees must enroll in the D-Care Plan prior to the beginning of the next tax year, and they must remain in the plan for the entire tax year with only a few specific exceptions. These exceptions are found in Section 4.7 of the Plan. 
      
      
   6. After enrollment, you may submit bills for allowed dependent care expenses which permit you to be employed. Generally, your reimbursement cannot exceed the lesser of the credits in your reimbursement account or $5,000 ($2,500 if married and filing separate tax returns). All funds withheld must be used for services provided within the tax year. Any excess funds remaining in the account must revert to the County under IRS regulations. 
      
      
   7. You must report the name, address, social security number or taxpayer identification number of all dependent care providers (persons and organizations) on your federal income tax return. 
      
   8. The IRS also requires that the amount of expense that you claim under the dependent care tax credit be reduced by the amount of expenses that are excluded from income under a dependent care assistance program (D-Care Plan).
      
      
   9. A copy of the County's D-Care Plan is available from your departmental payroll clerk and is on-line in the mainline computer (OPRI system). To view the plan document, go to the General User Primary Menu, select the "I" OPRI Option. Next, select Personnel Regulations. T plan is listed as PRS150-5 "Dependent Care Reimbursement Program."
      

3. REQUIREMENTS FOR BOTH THE "D-CARE PLAN" AND THE INCOME TAX CREDIT:
   
   
   1. Some rules for use of a D-Care Plan and the income tax credit are the same:
      
      
      1. You must be at work while your child or other dependent is receiving care. If you are married, you spouse must also be working, or a full-time student or unable to care or himself or herself.
         
         
      2. The cut-off age for eligible children is under the age of 13. Other dependents (such as children age 13 or over, parents, or a spouse) are eligible on if they are physically or mentally unable to care for themselves.
         
         
      3. The child or other dependent receiving care must live in your home, and be claimed as a dependent on your federal income tax return.
         
         
      4. You must pay a qualified dependent care provider to care for your eligible dependent at your home, at a licensed dependent care center, at a day camp or the like. A qualified provider does not include: any dependent you claim as an exemption on your income tax return; your child who is under the age of 19; a school; an overnight camp. 
         
         
      5. You can only receive credit or reimbursement for qualifying expenses while you are working. You cannot claim such credit or reimbursement for periods when you (and your spouse, if s/he is working) are off work for any reason---vacation, holidays, sick leave, leave without pay, or the like.
         
         
      6. For each person or organization providing dependent care, you must shown the name, address and taxpayer identification number (except for tax-exempt dependent care centers) on your federal income tax return.
         

   2. For more information on requirements dependent care assistance programs, see IRS Publication 503. For more information on requirements for the income tax credit for dependent care, see IRS Form 2441 and the Instruction Sheet for Form 2441.
      

4. DIFFERENCES BETWEEN THE D-CARE PLAN AND INCOME TAX CREDIT: 
   
   
   1. The D-Care Plan requires that you enroll in the plan during a specified period. You cannot elect to join later or change the amount of monies you are setting aside, except for certain specific reasons. 
      
      Under the D-Care Plan, you must determine the amount you will place in the plan at the time you enroll. You should estimate and fund your D-Care Plan account carefully, so that you don't have unused dollars at the end of the Plan Year. IRS regulations require that you forfeit any unspent money---the general rule is "use it or lose it."
      
      
   2. The maximum annual benefit for the D-Care Plan for an unmarried participant is the lesser of: $5000, or earned income for the Plan Year. For a participant who is married at the close of a Plan Year, the maximum annual benefit is the lesser of: the employee's earned income for the Plan year; the earned income of the spouse for the Plan Year; or $5,000 ($2,500 in the case of a married participant filing a separate federal income tax return from his/her spouse). Your tax-savings under the D-Care Plan are equal to your tax rate multiplied by the expenses paid under the D-Care Plan, plus your expenses paid under the plan multiplied by the Social Security contribution rate (7.65% for most employees on earnings up to $65,400 in a year for 1997). The expenses paid under the D-Care Plan cannot exceed the maximum annual benefit. 
      
      
   3. Because your salary reduction contributions under the D-Care Plan are not subject to Social Security contributions, your future Social Security benefits could be slightly reduced as a result of your participation in the D-Care Plan. 
      
      
   4. For the income tax credit, there is a dollar limit on the amount of work-related expense you can use to figure the credit. If you are single, the dollar limit is the lesser of: your earned income for the year; or, $2400 for one qualified dependent or $4800 for two or more qualified dependents. If you are married at the end of the year, the dollar limit is the lesser of: your earned income for the year or your spouse's earned income for the year; or, $2400 for one qualified dependent or $4800 for two or more qualified dependents. The tax credit is computed by multiplying the allowable expenses by a percentage factor based on your adjusted gross income. This factor is listed on IRS form 2441. The percentage factor ranges from 30% to 20%, and decreases as income increases. There is no dependent care tax credit for California state income tax. 
      
      
   5. The primary difference between the D-Care Plan and the tax credit is that the D-Care Plan provides a reduction in your taxable income, while the tax credit offers a direct reduction in the amount of tax you pay. You can't use the D-Care Plan and the tax credit for the same expenses. In addition, use of the D-Care Plan will reduce, dollar for dollar, your tax credit. However, qualified dependent care expenses not applied towards one method may be applied to the other, so it is possible to enroll in the D-Care Plan and use the tax credit for some expenses.
      

5. FREQUENTLY ASKED QUESTIONS AND ANSWERS:
   
   
   1. Who is eligible to participate?

      You must be a budgeted full-time or budgeted part-time employee of the County of Santa Cruz (County) to participate. The law requires that (a) you must be single, or (b) if you are married, your spouse must be working, looking for work, in school full-time, or handicapped and unable to work. You must be making dependent care payments so that you (or your spouse, if applicable) work.
      
      

   2. Can everyone save taxes this way?
      
      Yes. Some people, however, can save more taxes by using the Dependent Care Tax Credit in computing their taxes (Form 2441), so you should examine your own situation carefully before you decide whether to participate. You may wish to consult with a qualified tax advisor before making this choice.
      
      
   3. What taxes can I save? 
      
      You will not have to pay federal income tax on the amounts you put into your dependent care spending account every payday. Also, in California, you will not have to pay state income tax on the amounts you put into your dependent care spending account.  You will not have to pay Social Security tax on the amounts you put into your dependent care spending account. This means, however, that you will have paid in a smaller total to Social Security over your working lifetime, and your Social Security benefit could be less than it would be if you do not sign up for this plan. For most people, the difference is negligible, but you should be aware of it. 
      
      
   4. How much of my salary can I put into a Dependent Care Spending Account? 
      
      If you are single, you may put in up to $5,000 per year (but no more than your actual income) If you are married, filing a joint federal income tax return with your spouse, you and your spouse together may put in up to $5,000 per year (but no more than the lower of your two incomes). If you are married, filing separately, your limit is $2,500. Those limits translate to $192.30 and $96.15 per bi-weekly pay period, respectively. These dollar limits apply to the amount of dependent care assistance you receive during the year. Therefore, if you also receive dependent care assistance under the plan of your spouse's employer or if you have received dependent care assistance under the plan of a former employer during this tax year, those amounts will be offset dollar-for-dollar against the amount you may contribute to the D-Care Plan.  There are special rules for employees whose spouses are full-time students or disabled; for the specifics that apply to you, call the County Auditor Controller's Office.
      
      
   5. What happens to the money?
      
      
      The County credits the money deducted from your paycheck to a dependent care spending account for you to draw on. See the next Q & A for information about how to do that.
      
      
   6. How do I receive reimbursement for my dependent care expenses? 
      
      You submit a claim form to the Auditor's Office with evidence of your qualifying dependent care expenses. See Q & A #8 for what dependent care expenses qualify under the tax law. The Auditor's Office will send you a check for the amount of your benefits.   The minimum reimbursement check amount is $25. You should save your expenses until they total at least that amount. If you send a claim for less than that, the Auditor's Office will hold it to combine with your next claim. At the end of the year, there is no minimum for the last payment of qualified benefits to obtain what is left in your account.

      If there is not enough in your dependent care spending account at any time during the year to cover the claim you have submitted, the Auditor's Office will pay you what is there. You must re-submit your claim to be paid the balance after the next payday, when more money is deposited in your account.

      You must include the tax I.D. number (or Social Security number) of the care provider on the claim form to be reimbursed. You should check with your provider to get that number. The tax law requires you to give this number, whether you take the tax credit or are reimbursed from a dependent care savings account. Your provider is required by law to give you this number. See Q & A #11 for a complete list of what must be on the bill.
      You may submit claims for 2002 expenses up until January 31, 2003.
      
      

   7. What records will I receive so I will know where my account stands? 
      
      You will receive a statement from the County following the close of each plan year showing total D-Care Plan contributions for the year. This information will appear on your Form W-2, and it will be mailed to you on or prior to January 31 of the following year.
      
      
   8. What expenses qualify? 
      
      To be reimbursed in the 2002 plan year, expenses must be incurred from January 1 through December 31, 2002.  Expenses can be for care of a child up to 13 years old, or for care of a dependent who is disabled or elderly and frail, who is living with you.  Your child care expenses can be for a sitter or housekeeper in your home, a family day care home, or a day care center. You can include the full amount you pay to a nursery school, even though part of it is for lunch and education expenses. Only the portion of the cost of summer camp that is attributable to day care can be included, and camp deposits made in the winter or spring cannot be reimbursed until the full bill is due. If you have questions about including summer camp costs, call the Auditor Controller's Office.  If you use a child care center providing care for more than six children, it must comply with applicable state and local licensing regulations. See Q & A #9 for information on how to find out if your center qualifies.

      
      To use your dependent care spending account for expenses for a disabled or elderly person, that person must be physically or mentally unable to care for himself or herself. The person must be your dependent for tax purposes, and you must provide more than half of his or her living expenses.  He or she must reside in your home at least eight hours a day. Thus you can pay out of your dependent care savings account for adult day care for a your frail elderly parent who lives with you and is a dependent on your tax return. You cannot use this account, however, to pay part of the cost of a nursing home for a parent in another city.

      You cannot claim payments to a relative for dependent care unless (a) the relative is not your dependent for the tax year, and (b) the relative is providing child care as an employee of another organization, or as a self-employed person in his or her own home, or as your employee for whom you are withholding Social Security taxes.
      
      

   9. How can I find out if my child care center qualifies by complying with applicable state and local licensing regulations? 
      
      Call the local child care information and referral service for the city, town, or county in which the center operates. 
      
   10. Can I sign up for a dependent care spending account if I'm married and my spouse doesn't work?
       
       No. The law is designed to assist single parents and families where both spouses work (or one is disabled or in school full time).
       
       
   11. Do I have to prove I have paid the money, or just provide a bill?
       
       You can send in a bill showing the services you are committed to pay for. If you receive a bill from your dependent care provider in advance for a week or a month of service, you can submit that bill and get the reimbursement from your account before you pay the bill.  The bill must include the date(s) of service, the tax I.D. number of the provider, a description of the service, and the dependent's name.
       
       
   12. My child care provider isn't a business; she doesn't give me a bill. Is there a form she could use?
       
       The Auditor Controller=s Office will provide a sample bill form for you to give your provider.
       
       
   13. My child care provider doesn't report income to the IRS. Does that affect my ability to use a dependent care spending account?
       
       You won't be able to get your money out of your dependent care spending account without the provider's Social Security number. You must list the provider's name, address, and tax I.D. number on your claim form if you want to be reimbursed. You should get the number from your provider before signing up for the plan. The provider is required by law to give it to you. (The only exception is if it's a non-profit organization under Internal Revenue Code Section 501(c)(3) such as a day care center operated by a non-profit religious or educational organization.) To get the tax benefit, you must provide the identification information. This is true for the tax credit as well as for the dependent care spending account.
       
       
   14. May I use both the tax credit and the dependent care spending account? 
       
       You may not add the advantages of the tax credit and the dependent care spending account. If you use the tax credit (Form 2441), every dollar of your salary you have put into a dependent care spending account reduces by one dollar the expenses you may claim for the tax credit. You may split the tax benefits between both arrangements, but there is no advantage to you in doing so.  You should carefully examine your own tax situation. In doing so, you may wish to consult with a qualified tax professional.
       
       
   15. What happens to the money if any is left over in my account? 
       
       You must be careful in estimating your expenses before you sign up. Any amounts left over after January 31, 2003, will be returned to the County. No money will be returned to participants.
       
       
   16. How do I sign up?
       
       Use the enrollment form in the back of this document. You must enroll by December 21, 2001.
       
       
   17. How can I decide how much to have withheld?
       
       Here are the steps to figure out how much to put into your account each payday:
       Add up the dependent care expenses you expect to have in 2002. 
       Include your regular child care costs, amounts you probably will have to pay for emergencies, and the amount you expect to pay for any special summer arrangements. Account for foresee able changes in your child care needs during the year, such as a child starting school in September. Don't forget to account for any periods when you might not pay for dependent care, such as vacation.
       If you have a question about what expenses are eligible, see Q & A #8 or call the Auditor Controller=s Office.
       Divide the total by 26. This is the amount to have put into your dependent care spending account each bi-weekly payday.
       To be safe, or if you think your estimate might be too high, reduce this figure to be sure you will spend the entire account by the end of the year.
       
       
   18. Can I change my dependent care spending account amount during the year? 
       
       
       You may only change your dependent care spending account deduction during the year if there is a change in your family or job status or certain other changes.
       For example, if you have another child during the year, you could increase your deduction. If you are a single parent and get married during the year to a non-working spouse, you may no longer continue to participate in the plan. If you and your non-working spouse divorce, and you become responsible for dependent care, you may join the plan. If your spouse loses or takes a job or changes from part-time to full-time, you may stop, start, or change your deduction, as appropriate.
       If you want to make a change and qualify to do so, you should get in touch with the Auditor Controller=s Office and complete a change form. It takes about one pay period to make such a change.
       You may not change your dependent care spending account deduction because of a Ahardship.@
       
       
   19. What happens to my account if I go on leave-without-pay in 2002? 
       
       If you are on leave-without-pay at any time during the year, you may not contribute to your dependent care spending account during that period. Your contributions will resume at the same rate when you return, unless you have had a change in family or job status or other qualifying change and wish to change your dependent care spending account deduction. See Q &A #18.
       You may continue to draw money out of your dependent care spending account in the same way for 2002 dependent care expenses while you are on leave.
       
       
   20. What happens if I leave employment with the County? 
       
       If you leave employment with the County, no money will be put into your dependent care spending account after your last paycheck. You may continue to draw money out of your dependent care spending account in the same way for 2002 dependent care expenses.
       
       
   21. What happens to my dependent care spending account if I die? 
       
       Your beneficiary can draw from your dependent care spending account for 2002 dependent care expenses by the same method.
       Your beneficiary for this account will be the same as the beneficiary you have listed for your County life insurance, unless you sign a special beneficiary form designating someone else. Call the Auditor Controller's Office if you wish to designate a different beneficiary.
       
       
   22. When must I sign up?
       
       For the 2002 plan, you must sign up by December 21, 2001. You will not have another chance to participate until the 2003 plan year, unless there's a change in your family or job status or other qualifying change. You are required to sign up again each plan year. If you had an election in place for the 2001 plan year, it will not automatically carry over to the 2002 plan year. You must complete a new election form to receive benefits in the 2002 plan year.

How can I obtain more information about the D-Care Plan?

For more information about the D-Care Plan, two documents are available in the ISD mainframe computer OPRI system or from your departmental payroll clerk. One is Personnel Administrative Manual Section 1205. This includes (a) a summary of the common elements of, and differences between, the tax credit and the D-Care Plan; (b) a series of questions and answers that include information on how to estimate your contributions to the D-Care Plan; (c) information on how to estimate your savings by using the tax credit versus the D-Care Plan; and (d) an enrollment form (PER1525). 

The other is the County of Santa Cruz Flexible Spending Program Amended and Restated Dependent Care Reimbursement Program plan document, which is part 150-5 of the Personnel Regulations and References. A copy of the County=s D-Care Plan is available from your departmental payroll clerk and is on-line in the mainline computer (OPRI system). To view these materials in the computer, go to the General User Primary Menu and select the AI@ (OPRI) Option.

Attachment A-1

The following is a simplified format for determining taxes under the two provisions. You will need to add to the items shown if you have additional income or tax credits. Be sure to take into account the Earned Income Credit for Federal taxes and any Renter Credit on California taxes. The examples shown below are just that; it is important that you estimate your own potential savings under each provision based on your particular circumstances, and consult a tax specialist if you have questions. Please note that the figures shown in the example below uses tax rates, exemptions, and standardized deductions for 1994 tax year; information for tax year 2001 is not available. 

The example shown below is for a single parent with two qualified dependents, $4,800 in allowable dependent care expenses, and $35,000 in wages.

Attachment A-2

The example shown below is for a working married couple with one qualified dependent, standard deductions, $2,400 in allowable dependent care expenses, and $25,000 in wages. 

You will need to add to the items shown if you have additional income or tax credits. Be sure to take into account the Earned Income Credit for Federal taxes and any Renter Credit on California taxes. The examples shown below are just that; it is important that you estimate your own potential savings under each provision based on your particular circumstances, and consult a tax specialist if you have questions. Please note that the figures shown in the example below uses tax rates, exemptions, and standardized deductions for 1994 tax year; information for tax year 2001 is not available. 

Click here for DCARE ENROLLMENT FORM