What is a Dependent Care FSA?

A Dependent Care FSA (DCA) is a reimbursement program that allows employees (participants) to set aside pre-tax funds to help pay for qualified dependent care expenses. Most participants use this program to pay for child daycare and after-school care expenses; however, it can be used to pay for adult daycare expenses as well. It serves as an alternative to using the Dependent Care Tax Credit.

How it Works

  • Participants make an annual election of up to $5,000 for single or married filing jointly, or $2,500 for married filing separately
  • The annual election is divided by the number of pay periods in the plan year. That amount is deducted from your paycheck each pay period.
  • The amount of your payroll deduction is deposited into your DCA and is available as it is deposited.
  • Funds must be used by your employer’s claims filing deadline or they will be forfeited. Unused funds will not rolled over to the next plan year.

Why Participate?

Tax Savings! Child and dependent care is a large expense for many American families. Millions of people rely on child care to be able to work, while others are responsible for older parents or disabled family members. If you pay for care of dependents in order to work, you’ll want to consider taking advantage of the savings this plan offers. Money contributed to a DCA is free from federal income, Social Security, and Medicare taxes and remains tax-free when it is spent.

The chart below illustrates potential savings at various contribution levels:

Tax Status

DCA Contribution

Annual Savings*

Married

(Filing Separately)

$2,500

$691

Single

$5,000

$1,382

Married

(Filing Jointly)

$5,000

$1,382

*For illustrative purposes only. Based on a typical tax situation of 15% federal tax, 7.65% FICA, and 5% state income tax. Your tax situation may be different. Consult a tax advisor. Do we want to include state tax since the majority of our participants are in Texas?

What’s Covered?

The list below is not all inclusive. Feel free to call us if you have a question about something not included on this list.

Guide to Some of the Most Frequently Asked About Expenses

Expense

Can I Use My DCA Funds?

Notes

After School Care (Also Extended Care & Before School Care)

Potentially

Program must be primarily for care of children up to the age of 13 so parents can work. If care has an educational purpose (i.e. gymnastics, music lessons, tutoring, etc.) the program is not eligible. Food/equipment/activity fees etc. that are billed as a separate line item are not eligible expenses.

Application Fees (Also Deposit & Registration Fees)

Yes

Eligible if application/deposit/registration fee is required to obtain care. Not eligible to be reimbursed until After care begins. If care at this provider never begins, the expense is not eligible.

Babysitters (in your home or someone else’s home) to allow you and your spouse to work

Potentially

Babysitter must not be a dependent of the employee or the employee’s spouse.

Day Camp

Potentially

Many day camps will be considered eligible expenses even if they have an educational theme (i.e. soccer, drama, etc.) Food/equipment/activity fees etc. that are billed as a separate line item are not eligible expenses.

If the Camp Facility provides overnight services, no portion is eligible even if the Day Camp portion is billed separately.

Day Care (Also Preschool)

Yes

 

Disabled Adult Care

Potentially

 

Elder Care

Potentially

Expenses must be for general care and not for medical services.

Kindergarten and Higher Grade Tuition

No

 

Late Pick Up Fees

Yes

Eligible if cost is for extended care of child

Late Payment Fees

No

 

Nursing Home (also Long Term Care)

No

 

Overnight Camp

No

 

Pre-payments

No

Expense may not be reimbursed until after care has commenced.

Summer School (Also Tuition)

No

 

Keep Your Receipts

We highly recommend that you keep your receipts and other supporting documentation related to your DCA expenses and reimbursement requests. The IRS requires appropriate documentation for all reimbursements which must include the following:

  • Provider’s Name and Contact Information
  • Dependents Name
  • Service Dates (start and end)
  • Description of Service
  • Expense Amount

Please note: credit card receipts do not typically include the above requirements and will not meet the criteria to verify the eligibility of the expense.

Who Qualifies as a Dependent?

  • Your qualifying child under the age of 13, who shares the same residence with you, or
  • Your spouse or qualifying child or qualifying relative who is physically or mentally unable to care for him/herself who shares the same residence with you and has income less than the Federal exemption amount.
  • Your tax advisor can provide further guidance if you are unsure if someone would qualify

Forms & Documents

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