Cost-Benefit Analyses of Employee Dependent Care Assistance Plans

An Employee Dependent Care Assistance Plan reduces the amount of tax withheld, increasing annual take-home pay. However, there are also costs of participating in a Plan. The funds deducted from the employee's earnings will not be immediately available. This penalizes the employee until expenses are actually reimbursed. This paper shows that the cost of not participating in a Dependent Care Assistance Plan is substantially higher for most employees than the opportunity cost of lost interest on savings. The findings hold even if finance charges for cash advances are necessary.