What Is a Dependent Care FSA and How Does It Work?
As the cost of living continues to rise around the country, many employees—especially those caring for family members—are looking for ways to reduce their expenses. One way organizations can help their teams save money is to offer a dependent care benefit.
These pre-tax benefits can save employees a lot of money on dependent care, and they are typically paid out via a dependent care flexible spending account, or DC-FSA. These accounts are also sometimes called dependent care reimbursement accounts, or DCRAs.
But how do DC-FSAs work, and how can they help your team members with their family budgets? Read on to find out.
What Is an FSA?
A flexible spending account—or FSA—is a savings account that allows employees to set aside pre-tax dollars for healthcare, dependent care, or “limited purpose” expenses, such as vision or dental care. An FSA may also be called a flexible spending arrangement. What an FSA will pay for depends on the type of account.
FSAs typically do not roll over from year to year. Employers may offer a grace period of two-and-a-half months, and some plans allow up to $610 per year to roll over. But generally, any remaining FSA funds return to the employer once the plan year expires.
The type of FSA—such as dependent care FSA or healthcare FSA—dictates what qualifies as a reimbursable expense.
What's the Difference Between Dependent Care FSAs and Healthcare FSAs?
You can use healthcare FSA funds to pay for (or to reimburse payment for) qualified medical expenses, such as copays, prescriptions, physical therapy, and certain healthcare products. Healthcare FSA funds may include a carryover period during which up to $610 of a year's funds can be used early in the following year.
You can use dependent care FSA funds for licensed day care, adult dependent care providers, and summer day camps. Dependent care FSA policies generally do not include a carryover or grace period.
Who Qualifies as a Dependent for DC-FSAs?
- A child under age 13 who lives with you for over half the year
- A child or adult with a mental or physical ailment that makes them incapable of caring for themselves
Are There Contribution Limits on a Dependent Care FSA?
Yes. The 2023 dependent care FSA contribution limit is $5,000 for singles or married couples filing jointly, and $2,500 each for married couples filing separately.
The Consolidated Appropriations Act (CAA)—signed into law in 2020—temporarily increased contribution limits and allowed employers sponsoring an FSA or dependent care benefit to grant employees the ability to roll over any unused amounts in their accounts.
But the CAA expired at the end of 2022, returning contribution limits to the amounts above and eliminating the rollover period for fund expiration.
What Types of Expenses Are Eligible for DC-FSA Reimbursements?
These expenses must be work-related to qualify—in other words, you must pay them so you (and your spouse if filing jointly) can either work or look for work.
The money placed into the FSA can be used for a number of different needs:
- School programs and before- or after-school care
- Adult care for qualifying dependents
- Licensed day care centers
- Nursery schools and preschools
- Placement fees for a dependent care provider
- Late pick-up fees
- Summer day camps
The key factor to consider is whether the cost is incurred for care that allows you to work. So before- and after-school care until your shift ends would qualify, but sleep-away camp and getting a sitter for a date night would not.
What Are the Benefits of a Dependent Care FSA?
According to the Federal Flexible Spending Account Program, by enrolling in a dependent care FSA, employees save an average of 30% on dependent care services.
If you have determined that your needs will require a set amount of money that aligns with the contribution amounts attached to the FSA, then it can be a hugely beneficial option for you, that will not only save you money, but also offer you extra benefits such as ease of use and variety of payment options.
For employers, offering an FSA can give you a leg up in the recruiting process. There are many employees who rely on these benefits to help support their families. Providing these benefits can be a huge draw for potential team members. When building a benefits package, consider offering a dependent care FSA.
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