DEPENDENT CARE FSA - WHAT YOU NEED TO KNOW
What is a dependent care FSA?
A Dependent care FSA is a flexible spending account for childcare and dependent care expenses offered by employers. FSA accounts for dependent care expenses are designed to provide a way to save pretax funds for dependent care expenses. The difference between a dependent care FSA and a healthcare FSA is what they can be used to pay for. A healthcare FSA is used to pay additional medical expenses not covered by your health insurance such as coinsurance and deductible amounts. A dependent care FSA is used exclusively for payment of dependent care related expenses such as daycare, after school and summer childcare expenses, dependent adult care, or eldercare expenses. The dependent care FSA unlike a healthcare FSA does not cover any of your dependent's healthcare-related expenses.
How does a dependent care FSA save you money?
The account is made up of funds that are pretax and available to the employee in an account set up to exclusively pay only dependent care expenses. The main way you save money through using an FSA is the funds are withdrawn before taxes are taken out of your paycheck. What this means is that you do not pay taxes out of your paycheck on the money deposited into a dependent care flexible spending account.
How do I obtain a dependent care FSA?
A dependent care FSA must be obtained through yours or your spouse's employer. You cannot get a dependent care FSA on your own privately through a company like you can with some insurance policies. If your employer does not offer one you could talk with your HR department and express your interest as an employee in having this benefit. This might be just what your employer needs to consider this in the future as a benefit that they do offer.
Who is considered a dependent for the dependent care FSA?
Any child who is legally your dependent up until their 13th birthday. Care provided during your working hours for another individual that is considered your dependent. Who else would qualify for this? Anyone considered your dependent who is physically or mentally unable to care for themselves and has lived with you for more than half of the year.
Types of services qualifying for payment under the dependent care FSA?
Approved daycare and childcare related expenses that are provided during the hours that you are at work. No childcare expenses can be paid that are not directly related to you working. You can even pay your family member or family friend for work-related childcare. Family and friends would qualify for payment as long as they are not considered a dependent of yours. Any questions regarding the eligibility of an individual you are hoping to pay using your FSA should be directed to your individual FSA plan provider. Many FSA providers even offer a chat option for a simple question like this right on their website.
How do I pay a childcare center for expenses?
Most childcare FSA accounts are set up for either direct payment to the service provider and or reimbursement to you. What you will need to provide to be reimbursed for these services is a receipt for care that reflects the information for the facility. The document provided from the facility will need to include the child’s name and proof of costs or payment made if you are being reimbursed for expenses. If it is an individual providing the services you can also pay them with these funds.
How can I pay someone using my dependent care FSA?
Do you need answers on how a dependent care FSA works? Are you wondering what the benefits of using a dependent care FSA are? Or are you already using one and looking to pay a friend or family member to watch your child using your dependent care FSA account?
My daughter is 7 months old. I am also using a dependent care FSA for the first time this year. I found the dependent care FSA somewhat confusing when I first started to use it. Researching made me realize that there needs to be more information available on how to use these accounts correctly. In this post, I will share what I have learned on how to use these accounts and where to turn for more information. I also wrote another post previously on how we determined the best daycare for our daughter and found a quality daycare in Toledo, Ohio for $119 a week. I have to say I am very please with the daycare we chose and the cost although still a bit pricey is far lower than some of the childcare facilities in the Toledo, Ohio area.
How do I pay a friend or family member who is watching my child during work hours? Do they need to provide a receipt?
The best answer I can provide to this is to check with your specific childcare FSA provider for my specific provider wage works they offered a form on their website that just needed to be filled out and signed by my sister when I needed her to fill in for my daycare which was closed. The representative at wage works that assisted me was very helpful in providing this information and directing me where to go to locate the form.
Contact your dependent care FSA provider
When in doubt contact the provider directly. A great way to contact the provider is with online chat tools on their website or by phone. I used the online chat with a representative option through wage works and it worked great. The representative was incredibly helpful in helping me to locate what I needed and the best part is it took me less than 5 minutes to gain contact and find the form needed.
Does the person I pay have tax responsibilities with the money paid?
Yes. The answer is plain and simple. The person providing care is responsible to claim the money paid to them for their services provided. Your caregiver can and should contact a tax professional for more information on how this works. I recommend doing that because they can provide better answers on tax related questions regarding how this should be handled. Tax implications are especially important to understand before providing care so that they can set aside funds needed to pay future taxes.
How does a Dependent Care FSA save you money?
I chose the dependent care FSA simply because of the cost of childcare for my daughter. I realized that returning to work after my daughter was born would require me to adjust to a large portion of my paycheck going to childcare expenses. This meant allowing me to begin saving in my last two weeks of my 8 weeks off on maternity leave and preparing myself for the amount of money coming out of my check every two weeks. The pretax advantage of a dependent care FSA is the money comes out before any payroll taxes saving you a significant amount every year. Wage Works the company that I use for my daughter’s dependent care FSA offers a dependent care FSA savings calculator. You can check the calculator out here which can help estimate your savings using this account.
Do I recommend a dependent care FSA after my own experience?
Absolutely. The dependent care FSA has been a very low hassle way to save and pay for my daughter’s daycare. Each week it requires me to select to pay her daycare directly or print a receipt and upload it. I usually select to upload a receipt to the website to request to pay me back and I am paid within a week.
How can the pay me back option save you more money?
The pay me back option is so simple. When I use pay me back I just upload a receipt from the daycare. I then receive the funds directly deposited to my bank account. In my experience this process usually takes less than a week. This has been the best option for me. I pay weekly using a cash-back credit card and earn cash-back on the money I pay to her daycare. This increases my savings and when I pay it off within a few days it costs me nothing additionally. I do never recommend paying using credit cards unless you do pay the balance off each month. This is what I currently do and I do not regret using credit cards in this way.
Is there a maximum amount of money you can add to your dependent care FSA each year?
The IRS sets the maximum amounts that can be contributed every year to a dependent care FSA. These are the dependent care FSA pre-tax contribution limits currently in 2020. Altering the amounts that you are contributing to a dependent care FSA requires a qualifying life event. A qualifying life event could be the birth of a child, adoption, or transfer of custody. Any of these changes would allow you to update the amount contributed each year. Otherwise the next time you will be able to update this amount will be the following year. You can do this with your Insurance benefits selection for most employers. Please make sure that you are confident in the amount you are selecting.
What amounts can I contribute to a childcare FSA?
Married filing separately - each parent could contribute $2,500 a year
Married filing jointly - $5,000 can be contributed by the couple
Single filing head of household - $5,000 can be contributed yearly
What qualities for payment with a Dependent Care FSA?
The cost of work-related childcare, daycare, preschool, or care for a disabled adult. Disabled adult must be unable to care for themselves to qualify and be considered your dependent.
What happens to your dependent care FSA money if you don't use it all by the end of the year?
All funds must be used for dates of service on or before December 31st each year. Typically they offer a few months afterward to redeem the remainder of the funds each year. In case you haven't claimed childcare expenses by January you may have until March of the following year to redeem past receipts.
What has my personal experience been with a dependent care FSA through Wage Works?
Until 2019 I had never used a dependent care FSA. I use a healthcare FSA through Wage Works for years and feel very comfortable with this company. They make it easy and quick to redeem funds and get reimbursed. Just a few things I will caution you on as you use a dependent care FSA for the first time.
Key things to remember about your Dependent Care FSA:
Make sure you understand that all funds that you do not use on eligible expenses by December 31st are forfeited. You will not be able to get reimbursed for these funds after the deadline. So I caution you to figure actual expenses as closely as possible to the amount you choose to contribute. For my daughter, I have chosen to contribute the full $5,000. How did I figure the amount to contribute to my childcare FSA? My daughter's current daycare costs $119 a week. At the end of the year this ends up being $476 per month. If you calculate this times 12 months it equals $5,712 for one year. The maximum I can contribute is lower than my childcare expenses for the year. This means it makes sense for me to contribute the full amount for one year.
Make sure to obtain and keep all receipts for childcare expenses throughout the entire year. Receipts are necessary for reimbursement of expenses. Each receipt paid must reflect eligible expenses for child or dependent care. These expenses must be provided for the dependent for which they are paid during the employers working hours.
Make sure you redeem eligible childcare expenses as soon as possible. Redeeming expenses on time can help prevent forgetting or losing any important information that might be required.
You will need to provide documentation provided by your childcare center form 2441 with your taxes each year. This should be provided from the daycare facility to file with your taxes each year.
For any further tax-related questions I recommend checking the IRS website. I have provided a link to information on their website here. Child and dependent care information from the IRS website.
Why I recommend a Childcare FSA?
I would recommend a childcare FSA for anyone who pays for childcare expenses while working. Childcare FSA accounts are a great way to save more money on daycare expenses for your child. I am happy to recommend dealing with WageWorks (my own FSA carrier) based on my experience with them. My employer offers Wageworks with all of my FSA and HRA accounts and I use them yearly. Personally I have had no issues at all with these accounts and have found Wageworks very helpful. If you have any further questions regarding a dependent care FSA please feel free to leave a comment below.
Please be advised the information I am providing in my post is just for informational purposes. This post should not be considered tax or legal advice. The information provided today in my post has been obtained through personal research. I wanted to share my own experience with my employer offered FSA plan through WageWorks. All FSA plans vary a little from carrier to carrier. However the same general rules apply to dependent care FSA plans across the United States as per IRS rules.
