QUESTION: An employee who participates in our DCAP has told us that the person who provides day care for his children won’t give him a taxpayer identification number (TIN). Can we reimburse his claim for expenses even though he does not have a TIN from the care provider?
ANSWER: Generally yes, if the expenses otherwise qualify for reimbursement. To support your treatment of the reimbursement as nontaxable, however, you should consider requiring a statement from the employee as evidence of his diligent efforts to obtain the TIN.
There is no specific requirement in the DCAP substantiation rules for the plan to obtain the care provider’s TIN. But to exclude dependent care assistance from an employee’s wages for purposes of FICA and federal income tax withholding, the employer must reasonably believe that the employee will be able to exclude the payment or benefit from income. Under the Code’s DCAP provisions, dependent care assistance generally cannot be excluded from income unless the employee includes the care provider’s name, address, and TIN on an IRS Form 2441 (“Child and Dependent Care Expenses”) filed with the employee’s federal income tax return. (If the care provider is an individual, the TIN is the individual’s Social Security number.) This requirement should be explained to employees in your DCAP’s informational materials.
However, there is an exception if the employee can show due diligence in trying to get the required information. The Form 2441 instructions define due diligence as “a serious and earnest effort” to get the information from the provider. Employees can show due diligence by keeping with their records either a Form W-10 (“Dependent Care Provider’s Identification and Certification”) completed by the provider or one of several other items of identification. Note that a TIN is not required if the provider is a tax-exempt organization or, in some circumstances, if the care is provided outside the U.S.
If the information from the care provider does not include a required TIN, employees must report on Form 2441 whatever information is available and attach a statement explaining that the provider did not give them the requested information. Thus, the employee—not the plan—generally bears responsibility for tracking down the provider’s TIN. However, before reimbursing any expense in the absence of that information, your plan may wish to consider obtaining a “due diligence” statement from the employee similar to the one that he will have to provide to the IRS. That should help establish your reasonable belief that the reimbursement is not subject to withholding. And you should investigate further if you have reason to believe that the failure to provide the TIN suggests other concerns, such as the use of a provider who doesn’t qualify under the Code.
For more information, see EBIA’s Cafeteria Plans manual at Sections XXV.H (“Form 2441— Employees Must File It With Their Form 1040”) and XXV.B (“How Can Employers Ensure That Only Employment-Related Expenses Are Reimbursed?”).
Contributing Editors: EBIA Staff.