Dependent Care Flexible Spending Account: A Comprehensive Guide
As a working parent, finding the right balance between work and family can be challenging. And with the high cost of childcare, assistance in paying for these expenses is always welcome. This is where a Dependent Care Flexible Spending Account (FSA) can come in handy.
In this comprehensive guide, we will discuss what a Dependent Care FSA is, how it works, who qualifies to participate, and how to use the account.
What Is A Dependent Care FSA?
A Dependent Care FSA is an employer-sponsored benefit that allows employees to set aside pre-tax dollars from their paychecks to pay for eligible dependent care expenses. These expenses include daycare centers, preschools, before and after-school programs, summer day camps as well as in-home caregivers such as nannies or babysitters.
The money contributed to the account is tax-free which means that you don’t have to pay federal income tax or Social Security tax on those funds. By using pre-tax dollars instead of after-tax dollars you may save up to 30% on your dependent care costs depending on your tax bracket.
How Does It Work?
To start using a Dependent Care FSA you must first enroll during your company’s open enrollment period or whenever you experience a qualifying life event such as getting married or having a child.
Once enrolled you decide how much money you want taken out of each paycheck and deposited into your account. The maximum amount allowed per year per household by the IRS for 2021 is $5,000 if filing taxes individually and $2,500 if married filing separately.
It’s important to consider carefully how much money you should contribute since any unused funds at the end of the plan year are forfeited unless your employer offers one of two options:
– The carryover option – This allows up to $550 remaining from one plan year into another.
– The grace period option – This allows employees to use any remaining funds from the previous plan year for up to two and a half months after the end of the plan year.
Who Qualifies For A Dependent Care FSA?
To qualify for a Dependent Care FSA, you must be employed and have dependent care expenses. Those who are eligible include:
– Parents with children under age 13
– Individuals who care for a disabled spouse or dependent
Additionally, you can only use your account to pay for eligible expenses incurred while you are at work. If you’re not currently working (for example, if you’re on leave), then your account is not accessible.
How To Use A Dependent Care FSA?
Using a Dependent Care FSA is simple. After enrolling in the program and setting aside money each paycheck into your account, all that’s left is to submit claims when payments are due.
Typically, there are two ways to submit claims:
1) Online: Many companies offer an online portal where participants can log in and submit their claims electronically. You may need receipts or invoices from service providers before submitting these documents online.
2) Paper: Alternatively, depending on how your employer has set up their system, participants may fill out paper forms available through HR or download them online then mail them along with receipts or invoices directly to the third-party administrator (TPA).
Once submitted, reimbursements will be made according to the payment schedule established by your employer’s TPA.
What Expenses Are Eligible?
The IRS outlines specific guidelines regarding what types of expenses qualify as daycare services which includes but is not limited to:
– Daycare centers
– Preschools
– Before-and-after-school programs
– Summer day camps
– In-home caregivers such as nannies or babysitters
In order for an expense to be considered eligible it must meet certain criteria including being necessary so that you (and your spouse if filing jointly) can work. Additionally, the expense cannot be paid to a person who you or your spouse claim as a dependent.
Expenses that do not qualify for reimbursement include:
– Overnight camps
– School tuition for kindergarten and above
– Extracurricular activities such as sports, dance lessons or music lessons
Benefits of A Dependent Care FSA
There are several benefits to using a Dependent Care FSA including:
1) Tax savings: By contributing pre-tax dollars into your account, you may reduce your taxable income and save money on taxes.
2) Financial relief: Dependent care is expensive but with an FSA you can allocate funds ahead of time which can provide some financial relief.
3) Flexibility: Since most employers allow participants to change their contribution amount during open enrollment, it’s possible to adjust the amount being set aside based on changes in dependent care needs throughout the year.
4) Convenience: The ability to submit claims online or by paper makes participating in a Dependent Care FSA convenient and hassle-free.
Conclusion
A Dependent Care Flexible Spending Account (FSA) is an excellent way for working parents with eligible dependents to save money on childcare expenses while reducing their taxable income. If you’re interested in enrolling, check with your employer’s HR department for more information about eligibility requirements and how to enroll. With proper planning and management of this benefit, it can help alleviate some of the financial burden associated with caring for dependents.