With open enrollment nearing, FSAs will be a focus for workers. If you have dependents to care for, heres what you need to know about FSA dependent care.
With open enrollment nearing for many employees and employers, FSAs will be on the minds of workers. And when it comes to employees with kids or elderly parents to care for, information about FSA dependent care expenses is crucial.
This article provides a deep dive into FSA dependent care and what’s involved.
What’s an FSA dependent care expense?
Flexible spending accounts, or FSAs, are a valuable benefit available for employees who pay for healthcare or who pay others to care for their children or dependents. Flexible spending accounts allow employees to reduce their taxable income every year in order to pay for a variety of goods and services. There are two main types of flexible spending accounts: Healthcare FSAs and Dependent Care FSAs. Healthcare accounts can be used for a variety of preventative and responsive health needs – from over the counter medicines, glasses, to insurance co-pays and deductibles. Dependent care accounts cover daycare and other service expenses specifically for children and adults in the employee’s care.
FSA Dependent Care
Dependent Care Flexible Spending Accounts, or DCFSAs, allow employees to set aside a specified amount every year to pay for care and services for their child or a dependent adult who requires care. DCFSAs are specific to reimbursements for the care of children or adults: they do not cover healthcare costs.
Workers elect an amount of pre-tax dollars to be deposited into their DCFSA every payday, automatically deducted by their employer. Whenever the employee incurs costs that are eligible, they submit receipts to the plan manager and are reimbursed the cost of the care or service from these untaxed dollars.
Who is eligible to participate in a DCFSA?
Working parents are eligible to participate in a Dependent Care Flexible Spending Account providing they are either a single working parent or a working couple. If one spouse or parent is actively looking for work, they are also eligible. Other avenues to eligibility are spouses who are unable to work due to a physical or mental impairment, as well as spouses that are enrolled in school full time.
For families or single working parents, the accounts cover the cost of care for children under the age of 13; elderly parents, tax dependents, or children over the age of 13 who cannot care for themselves because of a physical or mental impairment; and/or a spouse who requires care.
What is the dependent care FSA limit for 2018?
Single caregivers may contribute up to $2,500.00 per year into their account. Married couples filing jointly may contribute up to $5,000.00 total (not each) per year. Accounts run for the calendar year, from January 1st to December 31st. Costs eligible for reimbursement must be for services purchased during the calendar year.
Participants save an average of 30% in taxes on the amount put into their Dependent Care FSAs.
What expenses are qualified for Dependent Care FSAs?
The list of expenses allowed under the IRS code for dependent care is exhaustive, a full version can be found here, and the list includes but is not limited to:
FSA dependent care expenses for children
- Babysitter, au pair, nanny, infant care or daycare in or outside the home
- Preschool/nursery school
- Sick child care
- Summer day camp
- Before or after school care
- Babysitting by a child who is not a tax dependent, aged 19 or older by the end of the calendar year
FSA dependent care expenses for adults
- Senior, dependent or elder care in or outside the home
- Adult day care centers
- Some registration and payment processing fees
- Payroll taxes related to eligible care
- Transportation to and from care given by a care provider
- Fees paid to an agency to find the services of a caregiver on your behalf
Is a dependent care FSA worth it?
The Society for Human Resource Management surveyed over 3,500 Human Resource professionals in 2018 and found 67% of businesses offer dependent care flexible spending accounts to their employees, yet recent studies put only 3 to 4% of eligible employees utilize the benefit.
This finding is rather unfortunate as its estimated participants save an average of 30% in taxes on the amount put into the fund, once they factor in state and federal withholding, FICA, and Social Security deductions. For a working couple, that means for the $5,000.00 they put into the fund, they’ve saved $1,500.00 overall. For a single person, adding $2,500.00 to the account equates to $750.00 in tax savings.
Depending on your region, child and dependent care can be costly; the national average cost to care for a single child under the age of 5 (with no special needs) in 2016 was $8,320.00, but that can go up to $12,000.00 a year or more, depending on location. At the low end, $160.00 per week is the least amount being spent. The tax savings alone could pay 15 weeks of childcare for a single parent and 31 weeks for a working couple.
But there can be some downsides to the perk such as:
The downside with any government sanctioned tax deduction is the paperwork. There are filings that need to be made at almost every step of the process. Employees must verify the status of the dependent: for children and adults who cannot care for themselves, a Social Security number will need to be provided.
The Social Security number of the caregiver (if an individual) or an employer identification number or EIN (if a facility) must be provided to verify eligibility for tax-exemption. If a caregiver won’t provide the information, no reimbursements can be made.
The Funds Don’t Roll Over
The use-it-or-lose-it rule applies to DCFSAs: any amounts of money not spent during the calendar year in which they were saved are forfeited to the Federal government. Employees must be careful planners when they determine how much to add to the fund at annual open enrollment. In only limited instances, employees may change their contribution mid-year following a qualifying event.
If you pay an individual to provide care, you are required to report and pay taxes on their income if they’ve earned more than $2,000.00 per year. The Household Employers Tax includes federal and state income tax, Social Security, Medicare, and FUTA (Federal Unemployment Tax Act) are paid by you, the employer. It’s important to keep meticulous records of how much you paid, the caregiver’s social security number and address and you will need a household Employer Identification Number (EIN) provided by the IRS.
For workers with children or dependents who need care, Dependent Care Flexible Spending Accounts could offer a way to offset some of these costs: working with your employer and maintaining good records could help employees realize significant savings.