Whether you are responsible for a young child, a disabled relative, or someone else who can’t take of themselves, it can be a tough job. Caring for someone else requires time, energy, and money.
Regardless of how much you love them, sometimes you’re short on these things and need some help. This is where a dependent FSA can come in – it’s a useful benefit offered by many employers. And you don’t want to miss out on its benefits if you’re caring for a dependent and in need of assistance.
What is a Dependent FSA?
FSA stands for “flexible spending account” and it is a pre-tax account that you can use to pay for eligible services required for your dependent. Both employee and employer receive tax benefits from this program. It can be a lifesaver for the employee with a dependent in their as it can save them up to 30 percent on expenses.
But, it doesn’t come without limitations. There are only certain things you can use this account for, and it’s not bottomless. It’s important to familiarize yourself with the details of this benefit before you pursue it for yourself.
Dependent FSA: Eligibility
The dependent FSA is a huge relief to thousands of families every year. However, it only works when you know how to use it properly and follow the dependent FSA rules. There are certain criteria that must be met before you are eligible, and the money can only be spent on certain things.
For someone to be considered a dependent, they must be:
- Children under 13.
- Elderly parents or other income tax dependents – such as a child over 13 who cannot for themselves due to a physical or mental impairment.
- A spouse who needs special .
Keep in mind that they must live with you and be claimed as dependents on your tax return. The limitations on the account are usually reasonable. Most expenses directly related to caring for the dependent while you work or look for work are covered:
- Daycare for children or daytime adult care facilities if necessary (and if your spouse works full-time)
- Homecare expenses, including the employment of a nanny.
- Summer day camp, as long as the parent is working and not on vacation when the child is at camp.
- Before and after school care.
- Deposits paid on eligible expenses as long as the care was provided later.
These cover most of the basics that could be required. An employer can provide their employees with great peace of mind by covering these things – will which keep disengagement at bay. The cost of disengaged employees can be high.
There are several things that may seem like they should be included, but they aren’t due to their unnecessary or extravagant nature. Some examples of these include:
- Overnight camp.
- Extra educational expenses like field trips.
- Kindergarten costs.
- Extracurriculars like sports or music .
- Nursing or hospices.
- Medical .
These things are useful and sometimes required for specific reasons, but are, unfortunately, not eligible for FSA spending. However, since you’re saving money by using dependent expenses, you might have an easier time paying for these things out of pocket.
How Does Dependent FSA Work?
Now you know the requirements and limitations you’ll be dealing with, but how does dependent FSA work? There are two simple steps once you’re enrolled: contribution and reimbursement. Each has its own specific process and limitations as well. The program itself is a good addition to any employer’s compensation management strategy, which can help prevent high employee turnover.
It’s important to note that your inclusion in the program is not automatic each year. Once the year is over, it will not be assumed that you’re enrolling again for the next year. You will need to manually renew your enrollment each year before the deadline.
Keep in mind that you must use all of the money you deposited into the account for qualified expenses by the end of the plan year or you will lose your money
The maximum you can contribute to this account in any given year is $5000, which is the maximum allowed by the IRS. This limit applies to married couples and singles alike. If you are married, each individual is limited to $2500 if both of their employers offer a dependent flexible spending account benefit.
Most of the time, plan contributions are made through direct payroll deductions. Your annual estimated costs are divided by the of paychecks you get in a year, and that amount will be taken off each check individually.
This reduces your taxable income on each paycheck, allowing you to spread the benefits out over the whole year.
There are two main types of reimbursement you may receive for your dependent FSA.
First, there are some plans that attach a special debit card to the account that lets you pay for eligible expenses directly. This gives the account money directly to the provider and doesn’t require you to go out of pocket for the expense. Offering this method of reimbursement adds an element of convenience to the life of the employee, which can result in better employee experience.
However, this is the minority and most accounts still use the traditional reimbursement model. For this method, you must pay the provider out of your own pocket, and then fill out some paperwork in order to get a reimbursement from the plan administrator. This can come in the form of a check or direct deposit.
There can be a delay of several weeks before the process is completed. This is normal and should be taken into consideration when you’re planning how and when to spend.
Also, ensure you are keeping expense records, receipts, and all other relevant details such as the type of expense and the provider’s details. This will all be required when submitting the paperwork.
It is also important to keep in mind the reimbursement limits. The way the contribution is spread out is beneficial from a tax perspective but it does limit the amount of reimbursement you can receive at one time.
If you make a large payment – for example, a $2000 daycare installment – you will only be reimbursed for the total amount available. If it is less than the $2000 you will have to wait until further contributions are made.
This can be frustrating but it is part of the dependent care FSA rules, meaning all you can do is plan accordingly. The dependent care FSA is not a simple program, therefore, it’s important to properly learn how to use dependent care FSA before getting started.
Dependent Care FSA Rollover
Another of the dependent care FSA rules pertains to rollover. The yearly limit on these accounts is $5000, but what if you don’t spend as much on care expenses as you originally predicted? This will cause many to wonder if there is a dependent care FSA rollover, allowing you to carry the extra funds into the following year.
Sadly, there is no dependent care FSA rollover allowed. There are other types of benefits and accounts that allow it, but not a dependent care FSA.
If you don’t spend all of the money, it is forfeited in terms of being deducted from your taxes. The reason is they operate under a “use it or lose it” rule.
The Importance of a Dependent Care FSA
For some, the care of their dependent is not an easy feat. The role that the dependent care FSA plays in their relatives or child care is crucial for most. Sometimes, it can be the difference between getting quality care and settling for something less than ideal. Or worse, losing their job.
Employers are smart to offer this benefit to their employees. High employee turnover is not good for anyone – the will suffer if employees keep leaving due to a lack of proper for their dependents. It’s also an important part of maintaining workplace morale and culture.
When employees can afford and provide sufficient for their dependent(s), they will be less stressed and more engaged at work. They can then put all their energy into their tasks for the day when they aren’t worried about their child or relative or the related expenses.