A Dependent Care FSA allows employees to accumulate pre-tax funds to reimburse for childcare expenses or day care expenses for a disabled or elderly/disabled dependent. If married, the employee generally will not be able to have a Dependent Care FSA unless their spouse is also employed, a full-time student, or disabled. In other words, both must need to work outside the home necessitating outside care for eligible dependents.
Depending on the tax bracket, paying for dependent care expenses with pre-tax dollars may provide substantial tax savings to the employee. Employers also benefit from the lower tax base of employee contribution that is redirected.
Under current regulations, the IRS limits the maximum annual amount you can deposit in your Dependent Care account to $5,000, or $2,500 if you are married and filing separately. The IRS imposes additional restrictions based on marital status, tax-filing status, and spousal income. Check with Sterling or your tax advisor for details. Healthcare reform legislation did not specifically address changes to Dependent Care FSAs.
Dependent Care FSAs are subject to the "use it or lose it" rule. Funds in the account do not roll over to the next plan year and may be forfeited if the employee leaves the company.
Dependent care expenses eligible for reimbursement include services provided for:
- A tax dependent under age 13
- Any other tax dependent, such as an elderly parent, who is physically or mentally incapable of self-care and has the same principal residence as the employee participant
- A spouse who is physically or mentally incapable of self-care and has the same principal residence as the employee participant
Ineligible expenses include:
- The cost of schooling
- Dependent care expenses paid to: one of your dependents, your spouse, or one of your children who is under the age of 19