Publication 15-B Employer'S Tax Guide To Fringe Benefits

Form W-2. Report the value of all dependent care assis-

Dependent Care Assistance

tance that you provide to an employee under a dependent

care assistance program in box 10 of the employee’s Form

This exclusion applies to household and dependent care

services that you pay for (directly or indirectly) or provide to

W-2. Include any amounts you cannot exclude from the

an employee under a dependent care assistance program

employee’s wages in boxes 1, 3, and 5.

that covers only your employees. The services must be for

a qualifying person’s care and must allow the employee to

Educational Assistance

work. These requirements are basically the same as the

tests that the employee would have to meet to claim the

This exclusion applies to educational assistance that you

dependent care credit if the employee paid for the serv-

provide to employees under an educational assistance

ices. For more information, see Qualifying Person Test

program. The exclusion also applies to graduate level

and Work-Related Expense Test in Publication 503,

courses.

Child and Dependent Care Expenses.

Educational assistance means amounts that you pay or

incur for your employees’ education expenses. These ex-

Employee. For this exclusion, treat the following individu-

penses generally include the cost of books, equipment,

als as employees.

fees, supplies, and tuition. However, these expenses do

•

A current employee.

not include the cost of a course or other education involv-

•

ing sports, games, or hobbies, unless the education:

A leased employee who has provided services to

you on a substantially full-time basis for at least a

•

Has a reasonable relationship to your business, or

year if the services are performed under your pri-

•

Is required as part of a degree program.

mary direction or control.

•

Yourself (if you are a sole proprietor).

Education expenses do not include the cost of tools or

•

A partner who performs services for a partnership.

supplies (other than textbooks) that your employee is al-

lowed to keep at the end of the course. Nor do they include

the cost of lodging, meals, or transportation.

Exclusion from wages. You can exclude the value of

benefits you provide to an employee under a dependent

Educational assistance program. An educational assis-

care assistance program from the employee’s wages if you

tance program is a separate written plan that provides

reasonably believe that the employee can exclude the

educational assistance only to your employees. The pro-

benefits from gross income.

gram qualifies only if all of the following tests are met.

An employee can generally exclude from gross income

•

up to $5,000 of benefits received under a dependent care

The program benefits employees who qualify under

assistance program each year. This limit is reduced to

rules set up by you that do not favor highly compen-

$2,500 for married employees filing separate returns.

sated employees. To determine whether your pro-

However, the exclusion cannot be more than the earned

gram meets this test, do not consider employees

income of either:

excluded from your program who are covered by a

•

collective bargaining agreement if there is evidence

The employee, or

that educational assistance was a subject of

•

The employee’s spouse.

good-faith bargaining.

Special rules apply to determine the earned income of a

•

The program does not provide more than 5% of its

spouse who is either a student or not able to care for

benefits during the year for shareholders or owners.

himself or herself. For more information on the earned

A shareholder or owner is someone who owns (on

income limit, see Pub. 503.

any day of the year) more than 5% of the stock or of

Exception for highly compensated employees. You

the capital or profits interest of your business.

cannot exclude dependent care assistance from the

•

The program does not allow employees to choose to

wages of a highly compensated employee unless the ben-

receive cash or other benefits that must be included

efits provided under the program do not favor highly com-

in gross income instead of educational assistance.

pensated employees and the program meets the

•

requirements described in section 129(d) of the Internal

You give reasonable notice of the program to eligible

Revenue Code.

employees.

For this exclusion, a highly compensated employee for

Your program can cover former employees if their employ-

2003 is an employee who meets either of the following

ment is the reason for the coverage.

tests.

For this exclusion, a highly compensated employee for

1) The employee was a 5% owner at any time during

2003 is an employee who meets either of the following

the year or the preceding year.

tests.

2) The employee received more than $90,000 in pay for

1) The employee was a 5% owner at any time during

the preceding year.

the year or the preceding year.

You can choose to ignore test (2) if the employee was not

2) The employee received more than $90,000 in pay for

also in the top 20% of employees when ranked by pay for

the preceding year.

Page 7

Publication 15-B Employer'S Tax Guide To Fringe Benefits - 2003 Page 7

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