Legal ruling 1993-1

Franchise Tax Board - Legal Division
PO Box 1468
Rancho Cordova CA 95812-1468

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April  23, 1993

Control Number: 410:BRL:CL-93-0108

Employer Child Care Program / Contribution Credit Salary Reduction Agreements


May a taxpayer which maintains a qualified cafeteria plan under Internal Revenue Code §125 that contains a salary reduction arrangement treat the employee designated amounts as "employer contributions" for purposes of computing the Revenue and Taxation Code §23617.5 Employer Child Care Program / Contribution Credit, even though the employee is entitled to exclude such amounts from gross income?


Corporation A maintains a cafeteria plan under Internal Revenue Code §125 under which employee-participants are entitled to exclude from gross income certain salary reduction amounts. The plan also contains an employee option to designate contributions to a qualified Dependent Care Assistant Program meeting the requirements of Internal Revenue Code §129.A's employees designate various amounts of salary reduction, and are reimbursed by the plan for child and dependent care expenses incurred.

Law and Analysis

Revenue and Taxation Code §23617.5, as amended by SB 2208 (Stats. 1990, Ch. 1347), allows a credit against tax of an amount equal to 50% of the cost paid or incurred by the taxpayer for contributions to a qualified care plan made on behalf of any dependent of the taxpayer's California employee who is under the age of 15. The 1990 amendment clarified that the amount of the credit is limited to $600 per dependent for contributions to a qualified care plan.

Revenue and Taxation Code §17131, relating to income exclusions of individuals, incorporates Internal Revenue Code §§125 and 129 by reference. Internal Revenue Code §129 allows an exclusion from gross income for amounts "paid or incurred by the employer" for dependent care assistance provided to employees, if the assistance is furnished pursuant to a qualified Dependent Care Assistance Program (DCAP). Internal Revenue Code §125 allows an exclusion from income for certain employee designated contributions to cafeteria plans, including §129 DCAP programs.

Revenue and Taxation Code §23617.5(c)(1) does not define "qualified care plan" but states that the term includes, but is not limited to, [the payment of or provision of] various types of dependent care, provided that the facility offering the care is located in California and operating under the authority of a license when required by state law.

Internal Revenue Code §129(e)(1) defines "dependent care assistance" as the payment of, or provision of those services which if paid for by the employee would be considered employment-related expenses under §21(b)(2).§21(b)(2)(C) specifically includes payments to dependent care centers for the care of specified qualifying individuals.

Revenue and Taxation Code §23617.5(c)(5) defines "contributions" to include employer reimbursements to employees for the employee's qualified care plan expenses, or direct payment to child care programs or providers, or both.

Under federal law, amounts designated by an employee and paid by the employer directly to a qualifying cafeteria plan are "employer contributions" paid or incurred by the employer under Internal Revenue Code §129.(See Temp. Treas. Reg. §1.125-1 Q-6, A-6.)

Because of the differences in the federal "dependent care assistance" and the state "qualified care plan" provisions, some amounts paid by the employer will qualify for the federal exclusion, but not the California credit, and vice versa.

For example, payments made to a child care center outside California would qualify for the federal exclusion but not the California credit. Payments made on behalf of a non-disabled dependent over the age of 12 but under age 15 would qualify for the California employer credit but not the employee exclusion.


For purposes of computing the credit allowable under Revenue and Taxation Code §23617.5, "employer contributions" can include amounts designated by employees in salary reduction agreements and excludable by the employees from gross income, but only to the extent that those amounts are used for qualifying dependent care plans under Revenue and Taxation Code §23617.5.

Drafting Information

The principal author of this notice is Bruce R. Langston of the Franchise Tax Board Legal Division. For further information regarding this notice, contact Mr. Langston at the Franchise Tax Board Legal Division, P.O. Box 1468, Sacramento, CA 95812-1468.

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