The Dependent Care Flexible Spending Account

When my wife and I were getting ready to have our first baby, we realized many new financial decisions were on the horizon.

This article will define what a Dependent Care Flexible Spending Account is, explain who is eligible to utilize a Dependent Care Flexible Spending Account, and help strategize how to best utilize a Dependent Care Flexible Spending Account to maximize your bottom line.

Let’s get started.

WHAT IS A DEPENDENT CARE FLEXIBLE SPENDING ACCOUNT?

The Federal Flexible Spending Account Program’s website explains that a Dependent Care Flexible Spending Account is a federal government program designed for employees to increase your spending power by paying for certain eligible expenses related to providing care for your dependents with money that has not been taxed.

A Dependent Care Flexible Spending Account is similar to a Health Care Flexible Spending Account, but the money in a Health Care Flexible Spending Account is directed towards health care expenses while the money in a Dependent Care Flexible Spending Account is directed towards expenses used to care for your dependents.

Also, as with the Dependent Care Flexible Spending Account, a Health Care Flexible Spending Account can only be utilized if offered by an employer.

WHO CAN HAVE A DEPENDENT CARE FLEXIBLE SPENDING ACCOUNT?

According to the Federal Flexible Spending Account Program’s website, you can utilize a Dependent Care Flexible Spending Account if you fulfill the following:

1. Your employer provides you with the opportunity to utilize a Dependent Care Flexible Spending Account
2. The dependent care expenses you incur are because you and your spouse are both working, looking for work, full time student(s), physically/mentally unable to work or you have each earned income
3. You file your taxes as either single, married filing jointly, married filing separately, or as a widow(er) with a dependent
4. Your dependent(s) must live with you and your spouse for at least half of the year
5. The expenses you sustain are to provide care for dependent(s) listed on your tax returns
6. Your eligible expenses were not made to someone you list as a dependent on your tax returns

WHAT ARE THE TAX BENEFITS ASSOCIATED WITH USING A DEPENDENT CARE FLEXIBLE SPENDING ACCOUNT?

When you receive a paycheck, you may notice that taxes itemized as MedFICA and FICA have already been taken out. These taxes are for Medicare and Social Security, respectively, and are collectively referred to as payroll taxes.

The money placed into a Dependent Care Flexible Spending Account is referred to as pre-tax dollars because this money is deposited into your Dependent Care Flexible Spending Account before

1. It can incur these payroll taxes
2. It can be included in the amount of income you pay state and federal income tax on

When used for eligible expenses, the money you have in your Dependent Care Flexible Spending Account is also withdrawn tax free.

The major benefit of the Dependent Care Flexible Spending Account program, as it allows for more of your money to be spent on qualified out-of-pocket dependent care expenses rather than be lost to paying taxes.

WHO QUALIFIES AS A DEPENDENT?

According to the Federal Flexible Spending Account Program’s website, there are two different types of dependents you can spend your Dependent Care Flexible Spending Account money on:

1. A family member, including your spouse, who lives with you but is either physically or cognitively limited to the point of not being able to care for themselves
2. Your child who is younger than 13 years of age

WHICH EXPENSES ARE ELIGIBLE FOR A DEPENDENT CARE FLEXIBLE SPENDING ACCOUNT REIMBURSEMENT?

The Federal Flexible Spending Account Program’s website states that the Internal Revenue Service establishes which dependent care expenses are considered qualified expenses.

You can find a comprehensive list of eligible expenses maintained by the Federal Flexible Spending Account Program here. I recommend that you take time to review this list so that you can maximize the money you save while using your Dependent Care Flexible Spending Account.

Simply click on the link I provided, click on “Dependent Care FSA,” and then type into the search bar any expense you would like to determine the eligibility for. The list sorts potential expenses as being either eligible or not eligible. Icons in the left-hand column ranging from a green check mark to a red X represent these options.

To assist you even further, let’s next take a look at some of the more common dependent care expenses for which you can receive reimbursement using your Dependent Care Flexible Spending Account.

WHAT ARE SOME COMMON ELIGIBLE CHILD DEPENDENT CARE FLEXIBLE SPENDING ACCOUNT EXPENSES?

1. Au Pair
2. Babysitting for a Work-Related Reason
   1. Either in Your Home or Someone Else’s Home
   2. By a Relative Who is Not Listed as a Dependent on Your Taxes
3. Before or After School Program
4. Preschool
5. Child Care
6. Day Camp
7. Housekeeper Who Care for Your Child Part-Time (only the time allotted to caring for your child is eligible)
8. Nanny

WHAT ARE SOME COMMON INELIGIBLE CHILD DEPENDENT CARE FLEXIBLE SPENDING ACCOUNT EXPENSES?

1. Babysitting for Non-Work-Related Reasons
2. Babysitting Performed by Someone Listed as a Dependent on Your Taxes
3. Field Trips
4. Kindergarten Tuition
5. Language Classes
6. Piano Lessons
7. Private School
8. School Tuition
9. Sleep-Away Camp
10. Tutoring

WHAT ARE SOME COMMON ELIGIBLE FAMILY MEMBER DEPENDENT CARE FLEXIBLE SPENDING ACCOUNT EXPENSES?

1. Adult Day Care Center
2. Custodial Elder Care for a Work-Related Reason
3. Elder Care Either in Your Home or Someone Else’s Home
4. Senior Day Care

WHAT ARE SOME COMMON INELIGIBLE FAMILY MEMBER DEPENDENT CARE FLEXIBLE SPENDING ACCOUNT EXPENSES?         

1. Custodial Elder Care for a Non-Work-Related Reason
2. Nursing Home Care       

HOW MUCH MONEY CAN YOU PUT INTO A DEPENDENT CARE FLEXIBLE SPENDING ACCOUNT?

The Internal Revenue Service explains that The American Rescue Plan increased the amount of money that can be contributed to Dependent Care Flexible Spending Accounts in 2021 from

1. $5,000 to $10,500 for both single filers and married couples filing jointly
2. $2,500 to $5,250 for a married individual filing separately

In other words, a married couple filing jointly can contribute up to $10,500 to their Dependent Care Flexible Spending Account during the tax year January 1, 2021 to December 31, 2021. This is irrespective of how many dependents you may have.

Unfortunately, though, not all employers adopted these new increases. Be sure to talk with your employer to ensure you don’t overcontribute to your account.

WHEN CAN YOU CONTRIBUTE TO YOUR DEPENDENT CARE FLEXIBLE SPENDING ACCOUNT?

Employees do not automatically have access to a Dependent Care Flexible Spending Account. Rather, each year during Open Enrollment, you have to elect to either enroll for the first time or renew enrollment to gain access to having a Dependent Care Flexible Spending Account.

The Internal Revenue Service also now offers the opportunity to make changes to your account such as enrolling in or making contributions to a Dependent Care Flexible Spending Account during the year outside of Open Enrollment when certain special circumstances occur.

The Federal Flexible Spending Account Program terms refers to these circumstances as “life events” and outlines what these are:

            – Change in Employment Status

            – Change in Marital Status

            – Change in Number of Dependents

            – Change in Residence

            – Change Coverage Cost

However, your employer must also offer these options to allow such changes to occur during the year. If not, then you cannot make a change to your Dependent Care Flexible Spending Account.

HOW DO YOU CONTRIBUTE TO A DEPENDENT CARE FLEXIBLE SAVINGS ACCOUNT?

Your employer will take an amount of pre-tax money from your paycheck that you specify during Open Enrollment on a regular basis and place it into your Dependent Care Flexible Savings Account.

HOW DO YOU GET REIMBURSED FOR YOUR EXPENSES?

When you make an out-of-pocket purchase, you will need to provide your employer with proof that your money was spent on an eligible expense. To verify this, you will have to provide a receipt and fill out information to detail this.

The Federal Flexible Spending Account Program’s website states that your receipt must include the following information:

1. The name of the person who received the service
2. The name of the provider selling you the eligible expense
3. The date this transaction occurred
4. How much money you spent on the qualified medical expense
5. What the qualified medical expense is

CAN MONEY IN A DEPENDENT CARE FLEXIBLE SPENDING ACCOUNT BE ROLLED OVER?

By the end of your benefit period, the remaining balance in a Dependent Care Flexible Spending Account was typically lost. This was referred to as a “use it or lose it phenomena.”

However, on December 27, 2020, the Consolidated Appropriations Act of 2021 was signed into law to provide relief due to the COVID-19 pandemic. Georgia’s Department of Administrative Services explains that, among several amendments, this law allowed employers to provide their employees with the opportunity to rollover their entire remaining Dependent Care Flexible Spending Account balance from the end of 2020 to the end of 2021 as well as from the end of 2021 to the end of 2022.

However, it is up to your employer to adopt this. If not, then you cannot rollover your Dependent Care Flexible Spending Account balance.

HOW MUCH MONEY SHOULD YOU CONTRIBUTE TO A DEPENDENT CARE FLEXIBLE SPENDING ACCOUNT?

Due to the “use it or lose it phenomena” of Dependent Care Flexible Spending Accounts, normally allied health employees would have to carefully estimate annual eligible expenses before deciding how much money to contribute.

However, with the ability to rollover your entire balance from the end of 2021 to the end of 2022 due the Consolidated Appropriations Act of 2021 as noted above, employees can be a little more lax with their estimations – at least for this year.

A word of caution, though: As of right now, a rollover is not allowed at the end of 2022. Therefore, don’t place money into a Dependent Care Flexible Spending Account you have no intention of using because, by the end of 2022, you could lose it.

IF YOU AND YOUR SPOUSE FILE TAXES MARRIED AND JOINTLY, WHICH SPOUSE SHOULD HAVE THE DEPENDENT CARE FLEXIBLE SPENDING ACCOUNT?

As mentioned earlier, taxes for Social Security and Medicare are taken out of your paycheck before you even receive your money. However, the amount paid for each of these can differ depending on income.

Social Security:

The amount of tax paid to Social Security will differ depending on if your income is above or below what is known as the Social Security wage base. The wage base for year 2021 is $142,800 and has been historically increased each year – these increases can be found here in a chart on Social Security’s website.

If your income is below or at the amount of the wage base, you must pay 6.2 percent of your income to Social Security. In other words, if your income was $50,000 then you would pay Social Security $3,100 (6.2 percent of $50,000). If your income was the same as the wage base at $142,800 then you would pay Social Security $8,853.60.

However, if your income is above the wage base, you will still only pay the maximum Social Security tax of $8,853.60.

Medicare:

No matter what your income is, the Internal Revenue Service explains that you must pay a flat tax of 1.45 percent of your income to Medicare.

On top of this, you must pay an additional 0.9 percent of your income to Medicare if you meet one of the following scenarios:

1. If you file single and your income is greater than $200,000 per year
2. If you file married and jointly if your income is greater than $250,000
3. If you file married and separately if your income is greater than $125,000

Takeaway:

The more you would typically lose to payroll taxes, the more you will save when you place money into a Dependent Care Flexible Spending Account.

Therefore, if your spouse if making less money than the Social Security wage base but you are making more money than the Social Security wage base, your spouse is losing more to payroll taxes. Thus, your spouse should have the Dependent Care Flexible Spending Account so that more money is saved from payroll taxes.

FINAL THOUGHTS. . .

The Dependent Care Flexible Spending Account can be a great tool to decrease money lost to expenses you already must pay by minimizing your tax burden. Hopefully this article helped provide you with knowledge on how this can be done.

Do you have any additional information to share on the Dependent Care Flexible Spending Account? Any questions on aspects that may not have been covered? Before moving on, please help make the Money Mobilizer a supportive and welcoming community for our current and future colleagues by leaving a question or sharing your knowledge below!