As we reported in the November 2004 issue of Benefits in Brief, the Working Families Tax Relief Act (WFTRA) took effect January 1, 2005. The WFTRA changed the definition of dependent found in Section 152 of the Internal Revenue Code (the Code). One key change included the addition of a gross income limitation to the Code’s definition of a qualifying relative.
Although health plans were explicitly excluded from the gross income limitation, there was no specific exception that allowed dependent care assistance plans (DCAPs) to disregard the gross income limitation. On December 16, 2005, nearly a year after the effective date of the WFTRA, Congress finally issued a technical correction. Under the new legislation, the definition of a qualifying individual for DCAP purposes has been amended to include the modified Code Section 152 definition of dependent that WFTRA created for health plan purposes. This effectively removes the gross income limitation from the DCAP definition.
The correction will apply retroactively to the original WFTRA effective date, January 1, 2005. Employers who amended their DCAP plan documents last year to include the gross income limitation may now want to revise their plans to expand the group of individuals whose expenses can qualify for a DCAP income exclusion.