The test that hourly employers pass without trying

Most pitches for employer-supported child care (including, candidly, many of mine) go to companies that pay well: law firms, investment firms, tech companies, professional services. Which is a bit odd, because the law has a test that those employers find challenging to pass, and that employers with mostly hourly workforces pass almost without trying.

The test is a nondiscrimination requirement. For care benefits to be tax-advantaged on the employee side, the average benefit for rank-and-file employees has to be at least 55% of the average benefit going to high earners and owners. At a professional firm, it's often the senior associates or junior partners who spend the most on childcare, so an ostensibly neutral program will often fail to be compliant. Careful design may mitigate this, but it's not easy and sometimes it's not possible.

Now consider a restaurant group, retail store, home care agency, or delivery company. Most of the workforce is hourly and few are what the IRS considers "highly compensated." A benefit offered on equal terms in this environment will almost automatically meet nondiscrimination rules. Together with the newly expanded employer childcare tax credits my firm designs programs around, this can make support for lower to middle income workers a tremendous boon for both employees and owners.

I'm an advocate but not a blind booster, so I want to mention a case where the program may not work. Very lucrative childcare support, above $7,500 per year, can have unintended consequences for some lower-paid workers. Above that amount, care support is generally considered taxable income, and the additional income may result in some workers losing out on eligibility for programs with income limits, like the earned income tax credit, ACA subsidies, and many state programs. This is in no way an insurmountable problem, but if someone pitches you a child care benefit for an hourly workforce and doesn't mention this catch, that tells you something.

Illustrative, not tax or legal advice.