Working parents know that childcare is expensive. Whether the kids are in daycare, before or after school care, day camps, or other care, it can put a big dent in your wallet. Care.com released its 10th Annual Cost of Care Report. They found that, on average, in 2023, parents spent a whopping 27% of their household income on childcare. While employer-sponsored healthcare benefits like a Flexible Spending Account (FSA) or Health Savings Account (HSA) are helpful, more is needed. There is another tax-advantaged account that can help people save money on childcare. The account is known as Dependent Care FSA (DCFSA) or DCAP.
What is a Dependent Care FSA or DCAP?
Like a healthcare FSA, which allows you to put aside money before taxes to cover approved healthcare expenses, a DCAP allows employees to set aside money each pay period for approved childcare expenses. The main benefit of a DCAP is that the account funds already allocated for childcare are not taxed. This tax savings helps reduce out-of-pocket costs by allowing people to pay for dependent care expenses using tax-free money.
The primary benefits of a Dependent Care FSA include:
- Increases take-home pay
- Reduces your total tax amount
- Lowers out-of-pocket dependent care expenses (your exact amount depends on your income tax bracket)
- Easy to set up and manage the account
Use this online FSA savings calculator to see how much you can save each year.
Who Should Sign Up for a DCFSA?
While a DCAP can be very beneficial for people with young children, most likely Gen X or Millennial parents, a DCAP can also help people caring for dependent adults, including older parents, spouses, or other dependents over age 13 who would not be able to care for themselves without help.
DCFSA Eligible Expenses
As with HSAs, FSAs, and other tax-advantaged accounts, the IRS restricts funds usage. With a Dependent Care FSA, the tax-free money must pay for eligible dependent care expenses for children under 13 and dependent adults while you and your spouse are at work or attending school. Otherwise, the money is taxable and must be included as earned income on your annual tax returns. See the lists below for eligible and non-eligible dependent care expenses.
Qualified Dependent Care Expenses*
- Nursery school and preschool
- Before or after-school programs
- Daycare for eligible children
- Summer day camp
- Babysitting and nanny expenses
- Sick child care
- Registration fees for eligible dependent care
- Au pair
- Work-related babysitting in your home or someone else’s home by a non-tax dependent relative
- Transportation to and from eligible care
- Work-related custodial elder care
- Adult daycare center
- Care for a spouse or relative who is physically or mentally incapable of self-care
Non-Qualified Dependent Care Expenses*
Some expenses that a DCAP cannot reimburse include:
- Babysitting for non-work purposes
- Custodial elder care for non-work-related purposes
- Educational, learning, or study skills services
- Field trips
- Housekeeping services
- Medical care
- Meals or snacks
- School tuition
- Overnight camps
- Tutoring
*These lists for eligible and non-eligible expenses are not all-inclusive.
Other Considerations
In addition to having a basic understanding of eligible expenses, the following information can be helpful when considering a Dependent Care FSA.
Dependent Care FSA Enrollment
You can enroll in a DCAP during two specific windows. The first is during your company’s annual enrollment period. Open enrollments generally take place sometime between October and December. The other is if you experience an approved “life event” that allows for mid-year enrollment. These events include marriage, divorce, a legal separation, the birth of a child, adoption of a child, or other changes that could impact your need for dependent care.
Annual Contribution Limit
In 2024, the maximum amount you can contribute to a Dependent Care FSA is $5,000 per household, per year. Remember, this money is contributed tax-free, so it gets taken out of your paycheck before taxes.
Unused Funds
Unused DCAP funds do not roll over to the coming year, unlike healthcare FSAs and HSAs. Therefore, any unspent funds left in your DCAP at the end of the year will return to your employer. You can use these tips to help you estimate how much to set aside.
Claims Submission
All submitted Dependent Care FSA claims should include supporting documentation. Talk to your benefits administrator about their requirements. Generally, you will need an expense form signed by the care provider. The form should include:
- the dependent’s name,
- the type of service provided,
- dates of service,
- the amount billed, and
- the provider’s name and address.
Remember that your benefits administrator will reject any claims submitted for ineligible expenses.
Remember to save all receipts because the IRS may request them to verify the eligibility of your expenses. Make sure the receipts are legible and contain all the necessary information. Documentation that does not meet IRS requirements includes credit card receipts, canceled checks, and balance forward statements.
For 40 years, DataPath has been a pivotal force in the employee benefits, financial services, and insurance industries. The company’s flagship DataPath Summit platform offers an integrated solution for managing CDH, HSA, Well-Being, COBRA, and Billing. Through its partnership with Accelergent Growth Solutions, DataPath also offers expert BPO services, automation, outsourced customer service, and award-winning marketing services.