What Is a Dependent Care FSA?
You have the option of participating in a Dependent Care Flexible Spending Account (FSA) established by your employer. The purpose of the FSA is to give you an opportunity to allocate pre-tax funds for qualified dependent care expenses. This account can help pay for dependent care while you work or search for employment.
The IRS provides guidance on which individuals qualify as eligible dependents and how to use the FSA to pay for their care. The following are generally considered eligible dependents:
- Children under 13
- Your spouse or dependent(s) who cannot care for themselves (physical or mental incapacity) and live with you at least half of the year.
- Dependent Care FSAs are governed by IRS rules. They are separate from medical FSAs.
How Does a Dependent Care FSA Work?
A Dependent Care FSA is an annual enrollment/reimbursement plan that works as follows:
- Annual Enrollment– Employees can sign-up for the plan at their employer’s open enrollment period or after a qualifying life event.
- Pre-Tax Contributions – Employees select an annual contribution amount which is deducted from each paycheck pre-taxed; thus lowering their taxable wages.
- Eligible Dependent Care Expenses – These funds may be used to reimburse qualifying dependent care (i.e. daycare, child care centers, preschool, before and after school care, babysitters/nanny’s as long as they file appropriate taxes, etc.) for dependent care, as long as it allows the employee (and spouse, if applicable) to work or look for jobs.
- Submitting Claims – Employees must submit receipts/evidence of payment to their Dependent Care FSA Administrator in order to get reimbursed.
- Reimbursement Process Employees will receive a reimbursement check from their account balance once reimbursement has been approved by the FSA administrator.
Who Can Use a Dependent Care FSA?
- For married employees, it is a requirement that both have earned income, unless one spouse has a disability or is actively searching for a job.
- For divorcing or separating parents, only the custodial parent can use Dependent Care FSA resources for child care costs.
- Employee contributions are capped at the lower of either the employee's earned income or the spouse's earned income, whichever is lower.
IRS Contribution Limits
The IRS limits Dependent Care FSA contributions to:
- $5,000 per household per year
- $2,500 if married and filing separately
Amounts over these limits are included in taxable income.