The Benefits of Offering Employees a Dependent Care FSA

Little kid in a swing with the title - All About Dependent Care FSA

Caring for a child or dependent is a huge expense to many of your employees. Offering a dependent care FSA option will help lessen this burden on your employees. It is a popular benefit your business can use to recruit and retain the best talent.

Dependent Care FSA

A Dependent Care FSA allows employees to use pretax dollars to reimburse certain expenses not covered by insurance. Here is everything you need to know about Dependent Care Flexible Spending Accounts.

To learn more about Health and Dependent FSAs, see our recent article here: What Are Flexible Spending Accounts? The Complete Employer’s Guide.

Millions of Americans have children or dependents who need care during the day while they work full-time. In most U.S. families, all of the adults work, putting a large financial burden on those families to find day care.

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The Center for American Progress fact sheet on child care states the annual cost of child care is higher than a year’s tuition at the average four-year public college in most states.

 

A Dependent Care FSA will help lessen the financial burden on your employees making them happier and possibly more engaged with their work. Your employees will be less stressed and feel greater loyalty toward your company when their needs are met through benefits like the Flexible Spending Account.

Employees can use an alternative to the account by taking a dependent care tax credit when filing their federal income taxes. However, FSAs usually offer the greater tax advantage.

Employees will select the amount they want to contribute to their FSA at the beginning of the year. The funds can be contributed in increments throughout the year, but can be used at any time.

The 2016 maximum Dependent Care spending account is limited to the smallest of the following:

  • $5,000 if employee is married and files joint tax returns or if the employee is single ($2,500 if married and filing separately),
  • The employee’s earned income for the year, or
  • The spouse’s earned income, if the employee is married at the end of the taxable year.

Expenses that can be covered by the Dependent Care FSA:

  • Care of dependent children under age 13 by a babysitter
  • Daycare center expenses
  • Expenses in before or after school programs
  • Daycare expenses of a parent or grandparent needing care while you work
  • Care of a child over 13 who is incapable of self care
  • A spouse that is unable to work or care for themselves

There are some pretty normal and practical expenses on that list, right?

Dependent Care accounts are not issued debit cards. In this case, your employees will need to be reimbursed for their purchases. To apply for reimbursement, employees will need to complete a claim form provided by the employer and include receipts or proof of payment. The receipt must include this specific information:

  • Date of expense,
  • Amount of expense,
  • Full name, address, and social security number or tax identification of the person providing care.

Check out our Flexible Spending Account FAQ page here.

Tax BenefitsChild coloring a picture with colored pencils

The main reason you and your employees should seek out FSAs is for their major tax benefits. The money contributed to the account is used pretax, so it will reduce the amount of income subject to taxes for the employee and for your business.

Employees should be aware that if their funds are unused by the end of the year, those funds will be forfeited over to the company. Generally, there is a grace period to help prevent employees from losing their funds, but it is important that employees are careful when calculating their contribution amounts.

If you would like more information on Flexible Spending Accounts like the Dependent Care or Health FSA, contact us with your questions and we’ll be happy to help.

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