Dependent care savings accounts

(a)

In general

Part VII of subchapter B of chapter 1 of the Internal Revenue Code of 1986 is amended by redesignating section 224 as section 225 and inserting after section 223 the following new section:

224.

Dependent care savings accounts

(a)

Deduction allowed

In the case of an individual, there shall be allowed as a deduction for the taxable year an amount equal to the aggregate amount paid in cash during such taxable year by or on behalf of the individual to a dependent care savings account of such individual. (b)

Limitation

(1)

In general

The amount allowable as a deduction under subsection (a) to an individual for the taxable year shall not exceed the lesser of— (A) $5,000, or (B) the individual’s earned income (within the meaning of section 21) for such taxable year. (2)

Coordination with dependent care assistance benefits

The limitation which would (but for this paragraph) apply under paragraph (1) to an individual for any taxable year shall be reduced (but not below zero) by the aggregate amount excludable from the individual’s gross income for such taxable year under section 129. (c)

Dependent care savings account

For purposes of this section— (1)

In general

The term dependent care savings account means a trust created or organized in the United States as a dependent care savings account exclusively for the purpose of paying the qualified dependent care expenses of the account beneficiary, but only if the written governing instrument creating the trust meets the following requirements: (A) Except in the case of a rollover contribution described in subsection (e)(5), no contribution will be accepted unless it is in cash, and contributions will not be accepted for the taxable year on behalf of any account beneficiary in excess of $10,000. (B) The trustee is a bank (as defined in section 408(n)) or such other person who demonstrates to the satisfaction of the Secretary that the manner in which such other person will administer the trust will be consistent with the requirements of this section. (C) No part of the trust assets will be invested in life insurance contracts. (D) The assets of the trust will not be commingled with other property except in a common trust fund or common investment fund. (E) The interest of an individual in the balance in his account is nonforfeitable. (2)

Qualified dependent care expenses

The term qualified dependent care expenses means the employment-related expenses (as defined in section 21(b)(2)) of the account beneficiary with respect to any qualifying individual (as defined in section 21(b)(1)) of the account beneficiary. Such term includes qualified long-term care services (as defined in section 7702B(c)), and amounts paid for qualified long-term care insurance contracts (as defined in section 7702B(b)), with respect to such qualifying individuals of the account beneficiary. (3)

Account beneficiary

The term account beneficiary means the individual on whose behalf the dependent care savings account was established. (4)

Certain rules to apply

Rules similar to the following rules shall apply for purposes of this section: (A) Section 219(d)(2) (relating to no deduction for rollovers). (B) Except as provided in section 129, section 219(f)(3) (relating to time when contributions deemed made). (C) Section 219(f)(5) (relating to employer payments). (D) Section 223(b)(6) (relating to denial of deduction to dependents). (E) Section 408(g) (relating to community property laws). (F) Section 408(h) (relating to custodial accounts). (d)

Tax treatment of accounts

(1)

In general

A dependent care savings account is exempt from taxation under this subtitle unless such account has ceased to be a dependent care savings account. Notwithstanding the preceding sentence, any such account is subject to the taxes imposed by section 511. (2)

Account terminations

Rules similar to the rules of paragraphs (2) and (4) of section 408(e) shall apply to dependent care savings accounts, and any amount treated as distributed under such rules shall be treated as not used to pay qualified dependent care expenses. (e)

Tax treatment of distributions

(1)

Amounts used for qualified dependent care expenses

Any amount paid or distributed out of a dependent care savings account which is used exclusively to pay qualified dependent care expenses of any account beneficiary shall not be includible in gross income. (2)

Inclusion of amounts not used for qualified dependent care expenses

Any amount paid or distributed out of a dependent care savings account which is not used exclusively to pay the qualified dependent care expenses of the account beneficiary shall be included in the gross income of such beneficiary. (3)

Excess contributions returned before due date of return

(A)

In general

If any excess contribution is contributed for a taxable year to any dependent care savings account of an individual, paragraph (2) shall not apply to distributions from the dependent care savings accounts of such individual (to the extent such distributions do not exceed the aggregate excess contributions to all such accounts of such individual for such year) if— (i) such distribution is received by the individual on or before the last day prescribed by law (including extensions of time) for filing such individual's return for such taxable year, and (ii) such distribution is accompanied by the amount of net income attributable to such excess contribution.

Any net income described in clause (ii) shall be included in the gross income of the individual for the taxable year in which it is received.

(B)

Excess contribution

For purposes of subparagraph (A), the term excess contribution means any contribution (other than a rollover contribution described in paragraph (5)) which is neither excludable from gross income under section 129 nor deductible under this section. (4)

Additional tax on distributions not used for qualified dependent care expenses

(A)

In general

The tax imposed by this chapter on the account beneficiary for any taxable year in which there is a payment or distribution from a dependent care savings account of such beneficiary which is includible in gross income under paragraph (2) shall be increased by 20 percent of the amount which is so includible. (B)

Exception for disability or death

Subparagraph (A) shall not apply if the payment or distribution is made after the account beneficiary becomes disabled within the meaning of section 72(m)(7) or dies. (5)

Rollover contribution

An amount is described in this paragraph as a rollover contribution if it meets the requirements of subparagraphs (A) and (B). (A)

In general

Paragraph (2) shall not apply to any amount paid or distributed from a dependent care savings account to the account beneficiary to the extent the amount received is paid into a dependent care savings account for the benefit of such beneficiary not later than the 60th day after the day on which the beneficiary receives the payment or distribution. (B)

Limitation

This paragraph shall not apply to any amount described in subparagraph (A) received by an individual from a dependent care savings account if, at any time during the 1-year period ending on the day of such receipt, such individual received any other amount described in subparagraph (A) from a dependent care savings account which was not includible in the individual's gross income because of the application of this paragraph. (6)

Coordination with dependent care credit

For purposes of determining the amount of the credit under section 21, any payment or distribution out of a dependent care savings account for qualified dependent care expenses shall not be treated as employment-related expenses. (7)

Transfer of account incident to divorce; treatment after death

Rules similar to the rules of paragraphs (7) and (8) of section 223 shall apply with respect to dependent care savings accounts. (f)

Reports

The Secretary may require the trustee of a dependent care savings account to make such reports regarding such account to the Secretary and to the account beneficiary with respect to contributions, distributions, the return of excess contributions, and such other matters as the Secretary determines appropriate. The reports required by this subsection shall be filed at such time and in such manner and furnished to such individuals at such time and in such manner as may be required by the Secretary.

(b)

Deduction allowed in computing adjusted gross income

Subsection (a) of section 62 of the Internal Revenue Code of 1986 is amended by inserting before the last sentence the following new paragraph:

(22)

Dependent care savings accounts

The deduction allowed by section 224(a).

(c)

Exclusion of employer contributions

Section 129 of the Internal Revenue Code of 1986 is amended by adding at the end the following new subsection:

(f)

Contributions to dependent care savings accounts

(1)

In general

Gross income of an employee does not include amounts contributed by an employee’s employer to any dependent care savings account (as defined in section 224) of such employee to the extent such amounts do not exceed the limitation under section 224(b)(1) which is applicable to such employee for such taxable year. (2)

Cross reference

For penalty on failure by employer to make comparable contributions to the dependent care savings accounts of comparable employees, see section 4980H.

(d)

Tax on excess contributions

Section 4973 of the Internal Revenue Code of 1986 is amended— (1) in subsection (a), by striking or at the end of paragraph (4), by adding or at the end of paragraph (5), and by inserting after paragraph (5) the following new paragraph:

(6) a dependent care savings account (as defined in section 224),

, and

(2) by adding at the end the following new subsection:

(h)

Excess contributions to dependent care savings accounts

For purposes of this section, in the case of a dependent care savings account (as defined in section 224), the term excess contributions means the sum of— (1) the aggregate amount contributed for the taxable year to the account (other than a rollover contribution described in section 224(e)(5)) which is neither excludable from gross income under section 129 nor allowable as a deduction under section 224 for such year, and (2) the amount determined under this subsection for the preceding taxable year, reduced by the sum of— (A) the distributions out of the account which were included in gross income under section 224(e)(2), and (B) the excess (if any) of— (i) the maximum amount allowable as a deduction under section 224(b)(1) for the taxable year, over (ii) the amount contributed to the account for the taxable year.

(e)

Failure of employer To make comparable dependent care savings account contributions

Chapter 43 of the Internal Revenue Code of 1986, as amended by the Patient Protection and Affordable Care Act, is amended by adding at the end the following new section:

4980J.

Failure of employer to make comparable dependent care savings account contributions

(a)

General rule

In the case of an employer who makes a contribution to the dependent care savings account of any employee during a calendar year, there is hereby imposed a tax on the failure of such employer to meet the requirements of subsection (b) for such calendar year. (b)

Rules and requirements

Rules and requirements similar to the rules and requirements of section 4980E shall apply for purposes of this section. (c)

Regulations

The Secretary shall issue regulations to carry out the purposes of this section. (d)

Exception

For purposes of applying section 4980E to a contribution to a dependent care savings account of an employee who is not a highly compensated employee (as defined in section 414(q)), highly compensated employees shall not be treated as comparable participating employees.

(f)

Clerical amendments

(1) The table of sections for part VII of subchapter B of chapter 1 of the Internal Revenue Code of 1986 is amended by redesignating the item relating to section 224 as an item relating to section 225, and by inserting before such item the following new item:

Sec. 224. Dependent care savings accounts.

(2) The table of sections for chapter 43 of such Code, as amended by the Patient Protection and Affordable Care Act, is amended by adding at the end the following new item:

Sec. 4980J. Failure of employer to make comparable dependent care savings account contributions.

(g)

Effective date

The amendments made by this section shall apply to taxable years beginning after the date of the enactment of this Act.