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Five things to know about Dependent Care FSA

Tuesday May 5th 2015

Many employers offer Dependent Care in conjunction with their Flexible Spending Accounts (FSA) toFSA_Thumbnail help employees save money on dependent care expenses.  Contributions to the Dependent Care account are made with pre-tax dollars, resulting in paying fewer taxes, increasing take-home pay and saving an average of 30% since they are not subject to payroll tax.  Dependent Care accounts help with expenses for the parent and spouse (if married) to work, look for work or attend school full-time.

Qualified dependents

In order to file claims and receive reimbursement under a dependent care account, the dependent must meet certain criteria:

  • Must be under the age of 13
  • Be mentally or physically disabled and whom the employee claims as a dependent on their federal income tax return
  • An adult who lives with the employee and for whom the employee is providing more than half of that individual’s support for the year

Contribution limits

Dependent Care contribution limits are established by the IRS.  Current limits are:

  • $2,500 per year, if you are married and filing separately
  • $5,000 per year, if you are married and filing a joint return, or if you are a single parent

What is covered 

You can be reimbursed for expenses related to after school care, preschool, child care/day care center, summer day camp, in-home child care and elder care (must be a qualifying individual).  Some expenses associated with dependent care are not eligible such as tutoring, summer school, overnight camp, food and transportation costs.

Reimbursement

Expenses are eligible for reimbursement when they have been incurred, not when they are billed or the services are paid for. For example, your day care provider requires you to pay for the month of September on September 1.  Since you can be only be reimbursed as the services are incurred, you can submit claims after each week, every two weeks or on October 1.  Reimbursements require the name and address of provider, the from/through dates of service and the amount of charge.

You will only receive reimbursement for the amount contributed to your Dependent Care FSA. For example, if you contribute $150 each month to your Dependent Care FSA, then you will only receive $150 in reimbursement each month. Any excess amount of expenses will be pended and automatically paid to you as contributions are posted to your account.

Changing Your Election

Generally, dependent care elections can’t be changed unless there is IRS change in status and the election change is consistent with the change in status event.

These IRS change in status events allow an FSA election change:

  • Change in legal marital status (marriage, death of spouse, divorce, legal separation, annulment)
  • Change in number of tax dependents (birth, death of dependent, adoption or placement for adoption)
  • Change in dependent’s eligibility
  • Change in employment status of employee, spouse or dependents

Other changes that may permit an election change under the Dependent Care FSA are:

  • Change of dependent care provider
  • Change of rate charged by unrelated dependent care provider
  • Child attaining age 13

A Dependent Care account can save money, reduce taxes, increase take-home pay and help manage expenses.  Check out our example to see how your spendable income could increase!

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