People generally associate Flexible Spending Accounts (FSAs) with healthcare. However, did you know there is a type of FSA that can be used for childcare and other dependent expenses? With a Dependent Care FSA, also known as Dependent Care Assistance Plan (DCAP), employees can set aside money to cover various dependent care costs while they are at work or school. Learn more below.
What is Dependent Care FSA?
A Dependent Care FSA is a tax-advantaged employer-sponsored benefit that helps employees save money on expenses they already have for child care. Each pay period, the money is taken out of their paycheck before taxes and set aside. That money can then be used tax-free to pay for a wide variety of childcare related expenses.
The primary benefits of a DCFSA include:
- Increases take-home pay
- Reduces your total tax amount
- Lowers out-of-pocket dependent care expenses by an average of 30% (your exact amount depends on your income tax bracket)
- Easy to set up and manage the account
Check out this short, funny video on DCAP benefits.
Dependent Care FSA Eligible Expenses
As with Health Savings Accounts (HSAs), FSAs, and other tax-advantaged accounts, the IRS places restrictions on how the funds can be used. With a Dependent Care FSA, the tax-free money must be used on dependent care expenses for children under the age of 13. They must also be used only for Dependent Care FSA eligible expenses as defined by the IRS. Otherwise, the money will be considered taxable and will have to be included as earned income on your annual tax returns.
In addition to basic daycare for eligible children, DCFSA funds can be used for many different types of care, including those for dependent adults. FSAfeds.com – a website sponsored by the U.S. Office of Personnel Management – identifies the following as Dependent Care FSA eligible expenses:
- Adult day care center
- Before or after-school programs
- Au pair
- Work-related babysitting in yours or someone else’s home
- Work-related babysitting by a non-tax dependent relative
- Babysitting and nanny expenses
- Sick child care
- Daycare for eligible children
- Nursery school and preschool
- Summer day camp
- Work-related custodial elder care
- Transportation to and from eligible care
- Registration fees for eligible dependent care
- Care for a spouse or relative who is physically or mentally incapable of self-care
Some dependent care expenses that do not qualify include:
- Babysitting for non-work purposes
- Custodial elder care that is not work-related
- Educational, learning, or study skills services
- Field trips
- Housekeeping services
- Medical care
- Meals or snacks
- School tuition
- Overnight camps
These lists for eligible and non-eligible expenses are not all-inclusive. Visit the fsafeds.com eligible expenses page for a complete list.
Dependent Care FSA Contribution Limits
The maximum amount you can contribute to a Dependent Care FSA is $5,000 per household, per year. If you are married and filing separately, the limit is $2,500. Remember, this money is contributed tax-free, so it gets taken out of your paycheck before taxes.
Signing up for a Dependent Care FSA
You can enroll in a Dependent Care FSA during your employer’s annual enrollment period. Another opportunity to enroll is if you experience an approved “life event,” that allows for mid-year enrollment. This can include marriage, divorce, a legal separation, birth of a child, adoption of a child, or other changes that could impact your need for dependent care.
Submitting Claims for Reimbursement
Talk to your benefits administrator about submitting claims and getting the right forms. If you have regular recurring expenses, you may be able to fill out a single claim that will reimburse you throughout the year.
To file a claim, you’ll need to include supporting documentation. For example, you can have the dependent care provider sign your claim form to verify the service. Or, you can provide an itemized statement from the provider. This statement should include your dependent’s name, the type of service provided, dates of service, the amount billed, and the provider’s name and address. Credit card receipts, canceled checks, and balance forward statements are not considered acceptable documentation.
Use the money or lose it
Any unspent funds left in your DCFSA at the end of the year will be forfeited to your employer. Unlike the medical flexible spending accounts and HSAs, you are not allowed to roll over any unused funds into the coming year. You may have a grace period for filing claims, so check with your benefits administrator.
DCFSA or dependent care tax credit?
If you have two or more dependents, the IRS allows for a $6,000 federal tax credit for dependent care expenses. But there is no double dipping from the tax credit and Dependent Care FSA; you must choose either the DCFSA or the tax credit.
The option that will provide the most savings depends on your household adjusted gross income. If it is less than $43,000, the federal tax credit may be the better option. If it exceeds $43,000, the DCFSA will likely provide more tax savings.
Talk to your employer or benefits administrator about a Dependent Care FSA. It can save you a lot of money and give you peace of mind while you’re at work.