Episode 13: Backup Care's Big Lie: Why Employers (and Families) Deserve Better

In this episode, Greg and Doug discuss the recent developments in backup care and childcare tax credits across Georgia, Missouri, and at the federal level. They explore the implications of these changes for employers and families, the inefficiencies of current backup care programs, and introduce a new model called Care Cash that aims to provide more value to employees. The conversation highlights the need for better alignment between childcare benefits and the actual needs of families.

takeaways

• Backup care is essential for employees to manage childcare emergencies.
• Georgia has introduced a new childcare tax credit to support employers.
• Missouri is considering a childcare contribution tax credit to address shortages.
• Federal tax credits for childcare are being expanded to provide more support.
• Backup care programs often fail to meet the needs of employees in rural areas.
• Many employees use out-of-network providers due to lack of local facilities.
• Current backup care models can lead to significant financial waste for employers.
• The reimbursement rates for out-of-network care are often much lower than expected.
• Care Cash is a new model designed to provide direct value to employees.
• Employers need to be aware of the complexities of childcare benefits across states.

Chapters

• 0:00 Introducing Child Care Tax Credits
• 3:26 Georgia's New Employer Tax Credit
• 6:39 Missouri's Multi-Faceted Approach
• 10:30 Federal 45F Credit Expansion
• 14:03 Exposing The Backup Care Deception
• 21:26 Introducing Care Cash Alternative

Transcript

Speaker 1: 0:02

Welcome to the Tax Break Breakdown with your hosts, greg and Doug. Sit back and relax while they review current and upcoming child care tax credit programs employers can take advantage of. Now on to the show.

Speaker 2: 0:16

All right, welcome everybody. Episode 13. Backup cares Big lie, why employers and families deserve more. Backup cares big lie, why employers and families deserve more. We're exposing some interesting things that you know, I think we've been silent on for quite a bit. But, as I think the last couple of years have treated us, we have found either a loophole that's being used or just people not really understanding what's happening when it comes to backup care, so we're going to talk about that. There are three things as well that you know we haven't we haven't recorded an episode, douglas, in a couple months. So, um, there are three things that I think have been big news that we'll talk about, but any news from you, Doug, to share.

Speaker 1: 1:10

It's been a while. Yeah, it has been a minute. Nothing crazy Kids getting older. Life keeps going. World is the world, so we keep moving.

Speaker 2: 1:21

But on your end, ai is dominating, ai is a thing yeah.

Speaker 2: 1:26

It is, uh, I think I am tied to it. It helps me in many different ways Speak more clearly, just all around, and even like research. So, um, research on, like you know I have a teenager, there's some bullying that happens. Um, research on, like you know I have a teenager, there's some bullying that happens. But there's also, like the other day she got upset with me and like she went into, just went straight into her room and I was like, did you just get mad at me? That's like, and so then you know it's a partner to also talk to, and then that brings up you know, like, do you share that information?

Speaker 2: 2:08

But I could, you know, as being a fan and advocate of therapy, it was like I could ask it questions that I don't know if I would have thought about. It gives me some suggestions, ways to handle things that are pretty like, actually pretty good. So I could see it. You know, I was thinking. An idea for an app is like a uh and and a large language model for dads to talk to their teens, cause it's it's hard.

Speaker 1: 2:35

Or or to know when to not talk to your teens. I think that's like one of the biggest challenges is uh you know kids in that age range and a lot of times it's like you just there's nothing you can say, that the perfect thing to do is to not say anything. Yes, that's, that's actually really tough sometimes.

Speaker 2: 2:55

Yes, I agree. Um, and I've. I read something somewhere where and this is probably applicable to, to me is like one uh, my daughter loves when I take her to school and pick her up because I'm quiet, I'm not poking and prodding every little question, it's just like I'm in, I'm in an introspective mode and she is just decompressing. And that's a good. That's good Even though we're not talking. But let's jump into something. So we have three things Georgia, missouri and the federal government. The first, those in Georgia, hb 136.

Speaker 2: 3:36

So this is from the Georgia legislature. They introduced a new employer tax credit for child care expenses. It went to the governor April 10th. It's anticipated to be effective 2026. The goal of this incentivize employers to support employees with child care costs. Wow, that's something that we've been talking about.

Speaker 2: 3:57

Yeah, and the way that I've read that it works is employers providing more than a thousand in childcare payments per employee annually can claim $500 per child, a thousand per child in the first year of providing such payments. There is a cap $20 million annually and employers must apply through the Georgia department of early care and learning. This is going to be amazing, but again, only 20 million. But is going to be amazing, but again only $20 million. But think about, if you just pay $1,000, you're going to get a $500 tax credit and then $1,000 per child in the first year, and out of everybody in Georgia there's only $20 million annually. So that can go pretty quick and this does not include the tax credit you can get from the federal government, the federal tax credit, the 45F, so amazing progress.

Speaker 2: 4:55

These are the things that we like to see. Any thoughts on this one on Georgia, before you jump into Missouri.

Speaker 1: 5:01

Yeah, I mean it looks like in year one. Potentially, if you do $ a thousand dollars per employee annually, you can get a thousand dollars back, uh, for child supported. So you can essentially wash that program in year, one amazing and then 50.

Speaker 1: 5:15

So yeah, I think it'll be interesting. Obviously, um lee was sent for signature on the 10th, so we'll have to see how it gets implemented, what the applications look like and things like that. But it'd be really really fascinating to see, because if the barriers are low, like this is why wouldn't you Right, I don't know Like it's going to be, like you just didn't know about it, like why would you not do this?

Speaker 2: 5:43

Well, I think we I I mean we run into that when we talk with employers it's like seems like such a no-brainer, why wouldn't we do this? And then I mean there's a lot of different reasons. It's not.

Speaker 1: 5:55

I mean they say it's not equitable it's not equitable, it's like we don't know if we're going to be able to continue it and like I get it, like I get it, but at the same time, especially when you look at, you know we sit on what people are assuming is going to be a recession, and different things like there's programs like this out there that allow you to support your employees um, maybe going through life events lost a job of a spouse different things like that.

Speaker 2: 6:17

I mean it should do I agree, and then layer this on with everything else that we've talked about you do love layers. And what if we do love the layers? So now imagine this situation. What if you were an employer in Georgia and Missouri? What's happening in Missouri?

Speaker 1: 6:39

Missouri, so this one still needs to get through the Senate. It's not a first signature yet, um, but this is H B house bill two, 69, passing through Missouri, um, and this is to address childcare shortages and support the workforce participation rate. And so this is a childcare contribution tax credit of 75% for donations to licensed childcare providers up to $200,000 per taxpayer annually.

Speaker 2: 7:10

That one, I believe, is. Correct me if I'm wrong. That one, I believe, is if you're like a person and you contribute money to a child care facility.

Speaker 1: 7:21

It says donations, so we'll have to get into the bill text and how that gets finalized. I think we've seen these a couple different ways, um, and they've been a bit ambiguous. Uh, for the most part, this tends to be a little bit more supply focused, so it's like more, I think, more larger entities or individuals that are donating. So less paying for carb, um, but, but we have seen that boost program that we've.

Speaker 1: 7:46

Yeah, it could be. It could be like a boost, a supply stabilization and growth program. It also we've seen these worded in ways where they actually do support, like paying for seats for employees or for the community or things like that. So there's always creative ways to utilize these. But it is really dependent on how the bill text ends up. But that's not all. That's just a piece of it.

Speaker 1: 8:09

There's an employer-provided child care assistance tax credit, which is 30% credit for the employer, up to $200,000 per taxpayer annually. So this is employer expenditures on employee child care. That's very similar to the federal credit. Then there's a child care providers tax credit, and so this actually helps providers with employer withholding taxes and can be up to 30% for capital improvements. So improving actual child care locations Now, again, we do have a total program cap of 20 million annually for capital improvements. So improving actual child care locations Now again, we do have a total program cap of $20 million annually. So these are a lot of different programs eating off of that same $20 million. So we'll have to see exactly how that gets allocated. But they did bake in a potential 15% increase if there is high demand, especially in areas where the shunt care doesn't. So when we're tracking very closely. I am on the Kansas side of Kansas, the Kansas City Metro but Missouri is very, very close, about five miles to my right at the moment, and it would be good to see this happening in the area as well.

Speaker 2: 9:23

Well, that is another layer to add. So if you're an employer that has employees in Georgia and Missouri, you're going to have two programs in 2026 that you can get a piece of the $40 million $20 million for each state. But you probably didn't know about that. That's why we're here.

Speaker 1: 9:43

That's why we're here. But let's talk about the really exciting one, because that's, if you have employees in a couple of states, what's happening at the federal level?

Speaker 2: 9:50

Federal level, us Congress. So they're expanding, potentially looking at expanding the 45F. So this is already in our codes and it's the form you would fill out at the federal level is IRS Form 8882. That gives you up to $150,000 as a tax credit if you do a couple things. There's two categories Helping support, like resource, referral style, finding care, you get 10%, or paying for care, and you get 25%. Up to $150,000 a year, up to $150,000 a year.

Speaker 2: 10:26

But they are looking to expand that from 25% to 50% of qualified child care expenditures. And just so everybody knows, like qualified child care expenditures unfortunately is not like friend, family, neighbor. It does have to be to like a center that's licensed. There could be other requirements, but they're clearly defined. It's not just friend, family, neighbor, um, but they're looking to also raise the annual cap up to 500,000. We've reported before that it was like 10 million and then it was like 2 million and then I now it's just going down, but still it's more than 150,000. That's so, um. And then there's going to be they're thinking of other provisions for small business, increasing it to 60% or 600,000, and then allowing joint ventures between employers to operate a child care facility. Now, who do you think advocated for that little stipulation that they can operate a child care facility with friends at the child care building company that has been around for 30 plus years.

Speaker 2: 11:37

They likely. I don't want. I'm not saying anything, but it's interesting where you see advocacy for just child care facilities.

Speaker 1: 12:00

Yeah, and I think again you see advocacy for just child care facilities on a wait list or have like significant economic challenges due to the cost of care being too high for the employees that they want to support. And so it's, they have their place and like they're fantastic. I know my, my older boy, was at a, an onsite facility for first, like three years of daycare that he was there. It was great, but that was like fully subsidized. If it wasn't fully subsidized we wouldn't have been able to do it at that time in our lives, and so I think that is a really, really big challenge where you look at that and then you have a bunch of employers coming together. That may be a little bit difficult to navigate but we'll see.

Speaker 2: 12:44

Yeah, and thinking through you know, even these three, there is going to be some complexity, right? So if you are an employer that have employees in Georgia and Missouri, like, those programs are taking off of your state taxes. So if you're not paying state taxes in those areas, that doesn't count, but maybe you have business like HQ there or something, so there's going to be some things there. But also, um, you can take advantage of the federal. So, like, how do you bring all of those together? Um, it's going to like that is something that we have been passionate about, um, I think.

Speaker 2: 13:21

I think if and when this 45 F can pass, that's going to level everybody up. And then you add on all the state-specific ones. I mean you're talking a lot of money that can be funneled from the government to businesses, down to families, and that's how you actually solve the root of this problem. And we're going to cue the expose music here, because we're about to uncover something that is not really talked about that I think we identified, and we obviously have a vested interest in this, because here's the, we'll paint the picture. Well, actually, why don't you share? For those that may not know what backup care is, emergency care?

Speaker 1: 14:11

What is it? Backup care, emergency care, has been one of the most kind of longest standing child care benefits that employers offer and I think it's really built around hey care so the employee can show up to work. Pay for that day of care so the employee can show up to work. Typically you see allocations between five to ten days a year, but we've also and I know you'll get into it we found that most of the time they don't really function that way. The theory is there but the practice has been a really, really big struggle, partially because it's a really difficult problem to solve. But that also creates its own challenges. So I'll let you dive into that piece of it.

Speaker 2: 15:12

Well, okay, so I'll explain a little bit about how, how the programs are intended to be used and maybe like a little bit of, I think, looking at the history of these backup care programs. They've typically gone after companies that have more centralized locations and more metro areas. You have, you know, these larger companies out there Bright Horizons, carecom, right, these companies that have been in the space for many, many, many years and bright horizons has both a couple, several different programs, but their backup program is generally, if they have between 700 plus facilities that are located in certain areas, right, and so, um, the employer can say, hey, employee, I'm gonna pay for you to be able to go to that facility down the street when you have a challenge, and the idea there is that the employee then can make it to work. Seems great. Well, as workers have now expanded out into your more rural and suburban areas, where these centers are not, what ends up happening is these companies have these credits. What ends up happening is these companies have these credits and then the employees can still use them, but because there's no facility close, what they end up doing is allowing what they call out-of-network reimbursements or friend-family-neighbor reimbursements. Because they can't fulfill the request. An employee comes in and says hey, I'm looking for a backup care center, but the nearest one is three hours away or more. So to solve that, they said okay, well, if you find your own provider, we'll go ahead and reimburse you a certain amount so you can pay that provider. That sounds interesting, but here is where the math does not math and I'm going to explain it.

Speaker 2: 17:08

I'm going to try to explain it and then may go into, like a different, an example. So companies typically pay for a bulk number of credits and a credit is supposed to equal one like one day of care, eight hours in one of these facilities. Those credits typically cost about $350 to $360. Let's say $360 per credit. So you, as the employer, you're purchasing 100 days up front. You're going to pay about $36,000. Plus you may pay an annual program fee and then an implementation fee that aren't too excessive.

Speaker 2: 17:49

The bulk of the spend is in those credits and a lot of these traditional backup care credit models also make those credits expire. So if you don't use 100 in the year, guess what? You lose them, because you know what they? They rot, you know they're like a banana. They just they have to expire. This is an area that I think I'm very passionate about, like what I get, why I get why, but it to me it is not the full value back to the company or to the employer. Right, there's like, there's like a an incentive actually for these backup care companies to not have them be used. So communication is poor because they want those credits to expire. I don't think that's malicious, but the incentive is not aligned for them to use them all.

Speaker 1: 18:37

Yeah, I don't know if anybody doesn't want them to be utilized, but at the same time, there's no. I think you're correct that the incentive for performance isn't necessarily alive. That's where, like we're both always like on the same page, is, like, you know, you want to deliver value. Right, there should always be value in each piece of it and that should be aligned between a vendor and an organization. And when that's not, when that's misaligned, that's when bad service happens, it's when bad experiences for parents in this case will occur. And that's what we're seeing when we're looking at these programs. We're having conversations, and why we put this together is like, hey, there's a significant shift in how people utilize these programs, where they are geographically, and it started to make them incredibly inefficient.

Speaker 2: 19:27

So here's an example. So you buy a credit for $360, right, if the employee uses it in one of their centers, I think there's enough value there. You know you have to pay for the center. All of the regulations make sense. $360 for a day of care, expensive. But you know their facilities are great, large, lots of security, very nice, good curriculum, very nice.

Speaker 2: 19:53

Okay, but for those employees and this is based off of real data 83% of people and this is across several different employers, I'd say between 70 and 85% of employees are not using the centers. They are using out of network reimbursement, so they're using their own network for a variety of reasons. And here is where the little trickery happens. When an employee uses an out of network provider, they are only getting $125, if they're really a hundred to $125 of that $360. So there is a gap of $200 and something. And guess where that goes?

Speaker 2: 20:33

Right back to the backup care provider. It does not go to a family, it does not go back to the employer, it does not go to the provider. And so think of, like, what that processing cost would be. It's insane. Now, I don't want to say that that's true, I haven't. Actually, this is an area where it's a little opaque for me Like I. There are cases that I've heard where the backup care provider will only charge them for a half a day if it's a reimbursement. So they'll charge 185 versus 125. So the difference is like 60 something dollars, but that's still about a 30% processing. Like imagine if you went to the grocery store and they first charged like a 2.3% swipe fee. This is like a 30% swipe fee.

Speaker 1: 21:20

Yeah.

Speaker 1: 21:21

That is ridiculous for essentially just, you know, moving money, reviewing a claim right and moving money on that side, and I think that's so. That's one part of it. The other thing is, when you start to open things up to out of network reimbursements and reimbursements in general, you need the appropriate controls in place so people don't abuse it. I think that's the other thing we hear on the side of it is hey, we're concerned about abuse. We're concerned about abuse and it's something that we've done a lot of work to put controls in place for organizations to make sure that they feel comfortable, but those don't always exist.

Speaker 2: 22:02

So that is the big takeaway here. We're still investigating this because we don't really know is it every client where it's 360 per credit and then they reimburse 125, so they take the whole amount half day deal, or do companies have to, like, ask for it? But this is our way of bringing this in transparency, because we've developed the model that is coming out called care cash. It's been out, but essentially what it is is, if you pay, if you want to give your employees 125, you're giving your employees 125. There's none of this like hidden fee and that incentivizes everybody. And so, um, we actually started to design a webpage that will.

Speaker 2: 22:53

I haven't fully shown you this, doug, I showed you a, I redid it, but it basically allows someone to come in and say, okay, I pay five for 500 credits. You know 80% are direct um reimburse, reimbursements to families. Here's how much they get if they direct to family. So, like, how much am I losing and how much would I save if I converted this to like a care cash stipend style model? So I will link that when it is done. But there's just. This is why we love coupons and why we love to save money. This is an area of waste. That it's just it's not valuable. It's going to catch up to them, I believe, because of these new models. But if you're going to pay $360 for childcare, you should get $360 of value, and that's not happening. So we have a new model and we'd love to talk about it.

Speaker 1: 23:47

Yeah, and I think you know, for those out there that you know, hear this and maybe are, are, you know, have a program like that or have run those in the past and are interested in seeing, um, you know, what the difference could be. Uh, we could we certainly could do an episode where we really break this down in detail and some like some great examples, Uh. But also, if you're just curious and want to have a conversation about it, uh, and see where the waste is like, see what a difference can be, Like, that's something we are always open to.

Speaker 2: 24:16

Yes, we are, and, with that said, we're going to cue the music. We'll see everybody. Happy Friday and have a good weekend.