It is the season for open enrollment and many employees are contemplating which employer provided benefits they should elect for 2016. One benefit that everyone with young children should evaluate is the Dependent Care Flexible Spending Account (FSA).
What is it?
A Dependent Care FSA allows you to use pre-tax dollars to pay for eligible expenses related to caring for a family member so you can work, look for work, or attend school full time.
Who can use it?
This is a plan that is provided by your employer AND you must have one of the following:
- Dependent child(ren) under 13 for whom you pay for childcare
- Dependent parent(s) or a disabled spouse who needs care while you work
What is the annual contribution limit?
The IRS limit states that up to $5,000 can be contributed to a Dependent Care FSA each year per family for taxpayers who file as individuals or married couples filing jointly. This is a combined limit that applies even if you each have a plan that is provided through your employer. The limit is $2,500 per year for a married person filing separately.
What expenses are eligible for reimbursement?
- Before and After School Care
- Summer Camps
More examples of eligible expenses can be found at the link: Practical Money Skills
How do I use it?
Most plans are funded through payroll deduction. A $5,000 annual deferral would be $416.66 per month (This is $208.33 per paycheck if you are paid twice a month or $192.31 per paycheck if you are paid every 2 weeks.) You can only be reimbursed up to your current account balance. Unlike Health Care FSAs you must contribute the money to the plan prior to being reimbursed. You can choose to be reimbursed in a variety of ways. Two common options are detailed below:
- Lump Sum Reimbursement – Defer throughout the year and turn in $5,000 of expenses at year end. Receive all of the reimbursement at once and use the money to fund a 529 plan to save for college or pay for a large expense.
- Reimburse as you go – Turn in expenses as they are incurred and be reimbursed the amount you contributed right after it is deducted from your paycheck. Check with the plan sponsor, but you can often be reimbursed within 1 -5 business days after a contribution is withheld from your paycheck.
Is it worth the hassle?
Clients often ask me if it is worth the hassle of jumping through hoops to receive the reimbursement. For many families, the answer is YES! As an example, a family that contributes $5,000 and is in the 25% marginal federal income tax bracket and the 5% marginal state tax bracket would save a total of $1,500 per year in taxes ($1,250 federal + $250 state).
Should I participate?
Consult with your tax advisor for help in deciding if you should participate. Contributing to a Dependent Care FSA could limit your ability to take a dependent child care tax credit when you file your taxes. As your income increases, Dependent Care FSAs typically provide a greater tax advantage, but your tax advisor can help you determine which benefit is right for you.
Additional information can also be found on the IRS website at the link: IRS