The Montgomery County Council has become what experts say is the first governmental body in the country to allow employes to set aside part of their regular salary for dependents' day care and thus not pay federal taxes on that income.
The council agreed unanimously late Tuesday night, following more than a year of discussion, to take advantage of new federal laws that permit employes to choose between cash or nontaxable fringe benefits in determining their total income.
Supporters praised the legislation, which takes effect in January 1985, as a cost-saving boon in a county where thousands of children are enrolled in day-care programs. The new legislation allows Montgomery's 5,600 employes to take up to all their income in tax-free payments for day care or other services such as home care for the handicapped and elderly.
"Day care as a fringe benefit is the most hopeful development on the horizon for relief to families from the tremendous cost of day care," said Council President David Scull, who first introduced the legislation.
Under the option, an employee earning $28,000 could choose to have, for example, $4,000 of that paid toward day-care and receive the other $24,000 in cash. The $24,000 would be taxed, and provide a basis for determining how much the county would pay in Social Security and worker's compensation costs. If the same employe took the regular federal income-tax deduction for child care, the maximum deduction he or she could take today would be $480 for one child.
One way the county could administer the program would be to issue day-care vouchers to an employe. The employe would turn over the vouchers to the day-care provider who would be reimbursed by the county.
Scull's office surveyed county workers earlier this year on whether they would be interested in the day-care and dependent care option and of the 1,203 who responded to the survey, 358 said they would be. Of that number, 282 said they were already paying for some type of care ranging from $160 a month for day care to $1,700 a month for elderly care.
There are about 40 private businesses around the country, including the parent company of the National Journal in Washington, which allow their employes to choose day-care payments in lieu of salary, according to Linda McFarland of Hewitt Associates, a national company that specializes in drafting fringe-benefit packages.
While Montgomery is probably the first jurisdiction in the country to approve such an option, McFarland said, a number of businesses and municipalities around the country are studying similar programs. They are holding off implementation, she said, until the Internal Revenue Service writes regulations interpreting the new federal laws in relation to day-care payments.
If the IRS does not allow tradeoffs between salary and day-care costs, employers could be required to pay large lump sums in back taxes and interest penalties, McFarland said.