A Dependent Care FSA is a Smart Way to Pay for Eligible Dependent Care Expenses
- By Edward A. Zurndorfer
- Dec 05, 2017
A dependent care flexible spending account (DCFSA) is a before-tax benefit account used to pay for eligible dependent care expenses. These expenses include preschool and summer day camp tuitions, before or after school programs for children under the age of 13 and child or adult daycare.
This column discusses the DCFSA that is offered through the federal flexible spending account program, FSAFEDS. In short, a DCFSA is a smart and simple way for an employee to save money while taking care of loved ones in order for the employee and, if married, the employee’s spouse to work.
Why Should an Employee with Dependent Care Expenses Enroll in a DCFSA?
An employee can save an average of 30 percent on dependent care expenses by enrolling in a DCFSA. The employee reduces his or her tax burden because funds used to pay qualifying dependent care expenses are deducted from the employee’s gross salary. The money withdrawn from the employee’s gross salary is not subject to federal and state income taxes, Social Security (FICA), and Medicare Part A (hospital insurance) payroll taxes.
Qualifying dependent care FSA eligible expenses include:
• Care for a child who is under age 13 including: (1) before and after school care; (2) babysitting and nanny expenses; (3) daycare, nursery school and preschool; and (4) summer day camp.
• Care for a tax dependent parent who is physically or mentally incapable of self-care and lives in the employee’s home.
More examples of DCFSA eligible expenses may be found at: https://fsafeds.com/explore/dcfsa/expenses. Employees who are contemplating enrolling in the DCFSA for 2018 can determine how much they can save using the DCFSA by using the dependent care FSA calculator found at: https://fsafeds.com/support/savingscalculators/dcfsa.
How to Participate in the DCFSA for 2018
Employees can only enroll in the FSAFEDS program including the DCFSA during the Federal Benefits Open Season, an employee’s new hire election period, or if the employee experiences a qualified life event (QLE) (for example, birth of a child or getting married). The DCFSA “open season” for 2018 is from Nov. 13 through Dec. 11, 2017.
The first step for participating in the DCFSA is for an employee to determine if he or she is eligible to participate by going to fsafeds.com/support/faq/eligibility.
Assuming the employee is eligible to participate in the DCFSA for 2018, the employee must decide how much will be spent in 2018 on qualifying expenses. Employees can contribute up to a maximum of:
• $2,500 if the employee is married and files a separate tax return, or
• $5,000 if the employee is married filing a joint tax return or if the employee is single or files as head of household.
The maximum annual contribution to a DCFSA may not exceed the following earned income limitations:
• Single employee. The earned income limitation is the employee’s salary excluding contributions to the DCFSA.
• Married employee. The earned income limitation is the lesser of the employee’s salary excluding contributions to the DCFSA, or the spouse’s salary.
The second step is to formally enroll in the DCFSA by going to https://fsafeds.com/enroll. After enrolling, the funds are withdrawn and spread equally over 26 pay dates starting with the first pay date in January 2018. The following example illustrates:
Joan is married and files her taxes jointly with her spouse. She elects to set aside $5,000 to her DCFSA during 2018. Starting with her first pay date during 2018, Joan will have deducted $5,000/26 or $192.30 from her gross salary into her DCFSA.
The third step is for the employee to use the DCFSA to pay eligible dependent care expenses and to decide which payment or reimbursement options to use.
While a DCFSA owner normally has until Dec. 31 of the plan year to spend the funds set aside in the owner’s DCFSA, the FSAFEDS program gives DCFSA owners a 2.5 month grace period to spend the funds allocated to their DCFSAs during the year. The DCFSA owner has until March 15 following the plan year to spend the DCFSA funds allocated to their accounts. If not spent by March 15, any unused DCFSA funds will be forfeited.
Note that the employee can use only the balance that is in the account to pay for eligible dependent care expenses. The employee may not use the entire election amount nor can the employee be advanced the money that has not been deposited into the account via payroll deduction but sometime during the year will be able to.
Employees must save their receipts for dependent care expenses and other supporting documentation related to DCFSA expense and claims. The IRS may request receipts to verify the eligibility of these expenses.
When submitting a DCFSA claim for reimbursement, the employee’s dependent care provider must certify the service by either signing the claim form or by providing an itemized statement from the dependent care provider that includes service dates, dependent’s name, type of service, amount billed and the provider’s name and address with a completed claim form. Credit card receipts, canceled checks, and balance forward statements do not meet the requirements for acceptable documentation.