What a dependent care FSA is

A dependent care flexible spending account, or dependent care FSA, lets employees set aside pretax dollars to pay for eligible care expenses so they can work. It is one of the most valued benefits you can offer working parents and employees with dependent adults, and it costs the employer very little to provide.

This guide is written for the HR side of the desk. If you are deciding whether to offer a dependent care FSA, or you already do and want to administer it without headaches, here is what you need to know.

How a dependent care FSA works

An employee elects an annual contribution amount during open enrollment or after a qualifying life event. That amount is deducted from their paychecks before taxes across the plan year. As they incur eligible care expenses, they submit claims and get reimbursed from their balance.

Two rules shape the whole benefit:

• The annual limit. The IRS caps dependent care FSA contributions, currently at 5,000 dollars for most filers and 2,500 dollars for those married filing separately. Confirm the current year figure before each enrollment.
• Use it or lose it. Unlike a healthcare FSA, dependent care FSA funds generally do not roll over. Employees forfeit money they do not use, which makes good election guidance part of your job.

What a dependent care FSA covers

Employees frequently ask what qualifies, so it helps to have a clear answer ready. Eligible expenses are those that allow the employee, and a spouse if married, to work. Common examples include:

• Daycare, nursery school, and preschool
• Before and after school care for children under 13
• Summer day camp
• In home care such as a nanny or babysitter while working
• Adult day care for a dependent who cannot care for themselves

Expenses that do not qualify include overnight camp, tuition for kindergarten and above, and care provided while the employee is not working. A short eligibility list in your enrollment materials prevents most confusion.

Can an employer contribute to a dependent care FSA?

Yes. Employers can contribute to an employee’s dependent care FSA, and some do as a recruiting and retention tool. The important caveat is that employer contributions count toward the same annual IRS limit as employee contributions. So if you contribute 1,000 dollars, the employee can elect up to the remaining balance of the cap, not on top of it. Employer contributions also have to satisfy nondiscrimination testing, which is designed to prevent the benefit from favoring highly compensated employees.

Is a dependent care FSA worth it?

For employees with real care costs, the answer is almost always yes. Paying for care with pretax dollars lowers taxable income, which can save hundreds or even a few thousand dollars a year depending on their tax bracket. For employers, it is a low cost benefit that also reduces your payroll tax on the contributed amounts. The main risk is the use it or lose it rule, which is a communication problem more than a design flaw.

Administering it without the headaches

The dependent care FSA is not complicated to run, but a few things trip employers up:

• Nondiscrimination testing. Plans must pass annual testing. Build this into your compliance calendar so it is not a surprise.
• Substantiation. Claims need documentation showing the care was provided. Software that captures this at submission keeps you clean.
• Life event changes. Elections can change with qualifying events such as a change in childcare provider or cost. Track these accurately.
• Clear communication. Because funds are forfeited if unused, employees deserve straightforward guidance at enrollment on how to estimate their election.

Handling these inside your benefits administration platform, rather than through spreadsheets and email, is what turns the dependent care FSA from a support burden into a smooth, well used benefit.

How BenefitWerks helps

BenefitWerks administers dependent care FSAs alongside the rest of your benefits, handling elections, substantiation, nondiscrimination testing support, and life event changes in one place. That means fewer questions in your HR inbox and a benefit your employees actually understand and use. To see it in action, request a demo.