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Guide for Implementing
Child Care Legislation

"Lower Income Federal Employee"
Determination

How should agencies determine whether a Federal employee qualifies as a "lower income Federal employee" for the purposes of this legislation?

Each agency has the discretion to determine who qualifies as a "lower income Federal employee" in a way that makes sense for their agency. Agencies may choose a particular definition for one location and a different definition at another location.

There are several methods for determining eligibility under this law. This guide provides agencies with a variety of suggested models. Keep in mind that the regulations allow for maximum flexibility. The intention is to allow agencies to determine what works best for them.

All of the suggested models in this document are based on the assumptions that:

  1. A Federal employees eligibility for this program considers total family income (TFI). TFI is the combined income of both of the childs parents/guardians and is listed on their IRS tax forms as their Adjusted Gross Income; and
  2. The amount of subsidy would be reduced by any current State and/or local subsidy the parents/guardians currently receive; and
  3. The use of these models is based on the expectation that employees must be willing to submit their pay slips and latest IRS 1040 or other relevant IRS tax forms to the administrators of the program for the purpose of verifying income.

Deciding on the amount of tuition assistance for each eligible Federal employee who applies for the program will involve two decision points:

(1) Setting an income threshold amount, which establishes the highest amount of total family income that can be earned in a given year in order for a Federal employee to be eligible for the program. Obviously, setting that amount very high or very low will greatly affect the population of employees who can benefit from this law. With some models, a threshold amount need not be set since the formula automatically disqualifies employee eligibility because of the relationship between their total family income and/or their actual, expected child care costs.

(2) Determining what amount of tuition assistance the agency will provide to a Federal employee. As you will see from the different models presented, the approach can vary from prescribing a set amount of tuition assistance using a sliding scale model, to prescribing a sum that is based on a percentage of total family income or a percentage of child care costs. You should also decide whether your formula addresses all child care costs for a given family or whether assistance will be made on a per child basis. One model is based on the cost of care for each child on an individual basis, while others are based on the total child care costs a family pays.

All of these decisions will have an impact, sometimes dramatic, on the amount of tuition assistance a family receives.

A comparison chart of five different models illustrates this point and is designed to help agencies understand the varying impacts on tuition assistance created by each model.

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Deciding on the Amount of Tuition Assistance

Step 1: Setting the Threshold:

The first step is the decision about whether to set a total family income threshold. Most models require this step although some do not (see model C). If a threshold is set, families with total family income above a certain threshold would not be eligible for tuition assistance.

A threshold amount could be based on:

  1. The State poverty level or a multiple of the poverty level. For example, an agency may set a threshold amount at 200% or 300% of the State poverty level. Head Start eligibility, for example, is based on State poverty level.
  2. A percentage of the State Median Income level (SMI). The Child Care and Development Fund, for example, is based on 85% or less of State Median Income; or
  3. Other criteria agencies may wish to use for setting an income threshold amount that make sense for them.

Families with income at or below the threshold amount would be eligible for tuition assistance.

Step 2: Determining the Tuition Assistance Amount:

The second step is to determine the assistance each qualifying employee will receive. Agencies may choose to use a formula that determines an amount of total family income that the family is expected to pay for its child care costs. Or they may choose to set a percentage of child care costs that the agency will pay using a graduated scale that is linked to total family income. Another approach is to use a tuition sliding scale to determine the amount a family is expected to pay for each child in care with the agency paying the difference. Each of these approaches has its own features and outcomes, and agencies should choose an approach that they have determined will best serve their needs and the needs of their lower income employees. Each of these models is further explained in the following section.

An important consideration is whether the model chosen results in an amount of tuition assistance that is adequate for an employee to use toward child care costs. For example, for lower income employees whose child care costs might be $6,000 annually, providing them with a reduction in tuition of only $600 a year might not be adequate for them to utilize licensed child care.

Agencies may wish to change the numerical factors in a given model to increase or decrease the amount of tuition assistance an employee might receive.

Note: Although the guide discusses tuition assistance an employee might receive, the actual disbursement is made directly to the child care provider, thereby reducing the tuition costs for the employee. Refer to the final regulations for more details about the law.

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Tax Implications

What are the tax implications of child care subsidies under this program?

The child care subsidies are generally taxable as income to the employee who benefits from them (26 U.S.C. 61 and 26 CFR 1.61-1).

Are the subsidies eligible for any type of tax exemption?

Yes, under certain conditions. The IRS has advised us that if an agency implements the child care subsidy program as a dependent care assistance program, described in section 129 of the Internal Revenue Code (Code), amounts of up to either $2,500 or $5,000 may be excluded from gross income.

To qualify for the exemption, an employee must claim the child as a dependent on the employees Federal income tax return. A disabled child must meet the definition located in 26 CFR 1.44A-1(b)(4) to qualify for the exemption.

Where can agencies obtain more information about setting up the child care subsidy as a dependent care assistance program?

The requirements of a dependent care assistance program are outlined in section 129 of the Code. There are also several reporting requirements that are imposed under this section. Agencies may obtain further guidance by calling the IRS, Office of the Associate Chief Counsel (Employee Benefits and Exempt Organizations), at (202) 622-6000.

How can employees ensure that they are calculating their exemptions correctly?

Please refer to Publication 503 "Child and Dependent Care Expenses." This publication may be found at the IRS web site, http://www.irs.gov/forms_pubs/pubs/p503toc.htm, or consult your tax advisor to be sure that you calculated the child care credits and exemptions correctly.

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Page Created 23 March 2000