IRS Proposes Long-Awaited Nondiscrimination Testing Rules For Dependent Care Assistance Programs

Last month, the Treasury Department and the IRS issued proposed regulations that provide guidance on the nondiscrimination testing rules for dependent care assistance programs (DCAPs) under Section 129 of the Internal Revenue Code (the “Code”).

In a welcome and long-awaited development, the proposed regulations clarify that, under the 55% average benefits test, only employees who receive dependent care assistance benefits are counted when running this test. The proposed regulations also establish a framework for testing eligibility and permit employers to correct certain failures through income inclusion and Form W-2 reporting.

The proposed regulations were issued with guidance on contributions to Code Section 128 Trump accounts (a new type of tax-advantaged savings account for children) because Code Section 128 incorporates several of Code Section 129’s nondiscrimination requirements. This post focuses on the Code Section 129 nondiscrimination rules applicable to DCAPs.