If you’re the primary caregiver to a child, an elderly parent or a disabled loved one, it can be difficult to justify the cost of hiring someone to replace you while you’re at work. Sometimes, it can even feel like you’re paying for the privilege to work. That’s where Dependent Care FSAs come in. These accounts were created to help working parents and caregivers pay for the care that allows them to go to work with pre-tax money. Depending on your tax bracket, that could mean you save up to 30% on those services.
Am I eligible for a Dependent Care FSA?
You’re eligible to participate in a Dependent Care FSA if both: your employer offers one, and you are the primary caregiver to a child under the age of 13, an elderly parent or family member who is physically or mentally incapable of taking care of themselves. In all cases, the people for whom you provide care for must live with you full time.
If you’re divorced, only the parent with primary custody may maintain a Dependent Care FSA. If you’re married, both spouses must either work or be looking for work that earns money.
If you don’t follow the eligibility rules around Dependent Care FSAs, you will forfeit any money you’ve contributed and then have to pay income taxes on those contributions.
Contributing to a Dependent Care FSA
If you wish to contribute to a Dependent Care FSA you must choose to do so during open enrollment. At that time, you’ll choose the amount you want to save during the year and your employer will take the appropriate amount out of each paycheck and deposit it into your account. Your employer may choose to contribute to your account but they are not required to do so.
Your annual contributions cannot exceed $5,000 if you’re a married couple that files your taxes jointly, or $2,500 if you’re an individual. If you’re a married couple and each of you has access to a Dependent Care FSA, you can contribute up to $2,500 in each account. If you want to change the amount you’ve elected to save, one of the following must apply:
- You've had a change in marital status
- You've had a change in the number of dependents
- The cost of care has changed
- You or your spouse has had a change in employment status
- Something happened to cause one of your dependents to either become eligible (e.g. an older child or parent who becomes disabled) or cease to be eligible (e.g. a child turns 14)
- You've had a change in residence
Using a Dependent Care FSA
To use your savings for approved expenses, you can either set up your account so that the FSA administrator pays your caregiver directly, or you can pay for the expenses first and then submit the proper documentation to get reimbursed. The reimbursement will come as either a check mailed to your address or a direct deposit into your account.
The following are expenses for which you can use your Dependent Care FSA money:
- Physical care
- In-home care like an au pair, nanny, or babysitter
- Care in an Institutional setting like child or adult daycare given by qualified caregivers
- Transportation provided by caregivers
- Application fees, deposits, etc. required for obtaining care (but only if care subsequently provided)
The following are expenses that you CANNOT use your FSA to pay for:
- Babysitting that’s provided by a sibling or child under the age of 19, or another individual who can be claimed as a dependent
- Babysitting for extracurricular activities like date night
- Education like private school or tutoring
- Overnight camps
- Enrichment activities like sports or music lessons
- Custodial nursing care or long-term care for parents not living with you
Do I get to keep my FSA contributions?
You must use your contributions within the plan year or risk forfeiting what remains. Your employer can allow you a 2 ½ month grace period during which you can try to use up any remaining contributions, or it can allow an up to $500 rollover to the next year. However, they can’t offer both.
If your employer offers a rollover and you take advantage of it, your contribution limit for that following year won’t be affected.
Unfortunately, if you leave your employer, you leave your Dependent Care FSA contributions as well. Anything that remains in your account will go back to your employer.
Dependent Care FSAs can lower your tax burden and help to ease the financial burden that often comes with being a primary caretaker. It could even help you stay in the workforce. And there’s a bonus! You can maintain an HSA while also maintaining this type of FSA. If you have further questions, ask your HR department about your company’s particular benefits plan.
Disclaimer: the content presented in this article are for informational purposes only, and is not, and must not be considered tax, investment, legal, accounting or financial planning advice, nor a recommendation as to a specific course of action. Investors should consult all available information, including fund prospectuses, and consult with appropriate tax, investment, accounting, legal, and accounting professionals, as appropriate, before making any investment or utilizing any financial planning strategy.