The first week of December—Time to deck the halls, shop for gifts, bake cookies . . . and, for many, time to make Flexible Spending Arrangement (FSA) elections for next year. You can almost hear employees across the country groaning as they reach for their calculators.
I’ve always taken full advantage of my employer’s FSA, both health care and dependent care. The potential savings from using a FSA fall into the category I call “free money.” Maximizing the savings potential does require a couple of skills—understanding the rules and being able to predict the future.
According to the International Foundation’s 2014 Employee Benefits Survey, 84.2% of corporations responding offer a FSA to employees. Most people I know take advantage of a health care FSA, but I’ve often heard other parents say that a Dependent Care FSA (DCFSA) is not worth the hassle. Others fear losing money deposited since the benefits are subject to an annual “use-or-lose” rule.
I argue that with a little thoughtful planning, using a DCFSA can yield substantial savings.
I participated in my employer’s DCFSA for 15 years. (My youngest aged out at 13 this past year.) Was it a hassle? At times, yes. But the occasional headache helped us save nearly $20,000 on child care over the years. The IRS allows a DCFSA election maximum of $5,000 a year for individuals or married couples filing jointly or $2,500 for a married person filing separately. Since DCFSA funds are not subject to federal, social security, Medicare or state taxes, the savings stack up quickly. (Your annual savings will depend on your DCFSA election amount and your tax bracket.)
Here are a few common questions/challenges I’ve encountered as my children grew up and our child-care needs evolved:
- What if I change day-care providers and my expenses change?
IRS rules allow for adjusting contributions due to a change of child-care providers or if provider increases or decreases fees, allowing you to adjust your DCFSA election during the plan year. Do check your specific plan rules, as this is allowed, but not required by the IRS. Some plans may prohibit changes. Also, be sure to make the adjustment before or close to the time the change takes place. (Note that this only applies if the cost change is imposed by a care provider who is not a relative of the employee.)
- What if I pay a relative/friend/neighbor to watch my kids?
As long as Grandma Jean reports the income on her taxes, you can use FSA funds to pay her. Your child-care provider does not need to be a licensed facility to use your FSA. (See IRS “Qualifing Person Test”.)
- What if I spend faster than I deposit funds into my DCFSA?
Unlike with medical FSA accounts, you cannot use future funds that you have committed to deposit with a DCFSA—You can withdraw only the amounts that have been deposited to date. So if you spend the full $5000 maximum by June, you will still need to wait for each deposit into your account before you can withdraw.
[Related: Ancillary Benefit Plans, February 15-16, 2016, San Diego, California]
Off to school they go. Is it still worthwhile to put money in a DCFSA just for summer child care? Yes! Summer child-care expenses can add up. The process for estimating expenses and retrieving your funds may be a little different from when you had the consistent monthly costs of toddler day care, but using a DCFSA for school-aged children is very manageable once you know the facts of your particular plan.
What types of summer programs qualify? According to IRS rules, “The cost of sending your child to a day camp may be a work-related expense, even if the camp specializes in a particular activity, such as computers or soccer.” Keep in mind that while an overnight camp may keep your child occupied during your work hours, no portion of overnight camps is eligible for your DCFSA. Additionally, summer school and tutoring programs are not allowable expenses for children in kindergarten or higher grade, but fees for wraparound care for such programs do qualify.
If you are tempted to take a pass on your employer’s DCFSA, I encourage you to talk to your benefits administrator, check for tools offered by the company that administers your FSA and consider the math—you might find that a little effort now could result in some extra cash in your family budget in 2016.
Ann Godsell, CEBS
Social Business Strategist at the International Foundation
Information provided in the Word on Benefits is developed by International Foundation staff. This does not constitute legal advice. Please consult your plan professionals for legal advice.