Details about the dependent care Flexible Spending Account

A dependent care Flexible Spending Account (FSA) enables qualified people to set aside pre-tax money for certain dependent care expenses. An employee is qualified if he or she works, has an eligible dependent, and one of the following is true:

• The employee is a single parent
  
  
• The employee has a working spouse
  
  
• The employee's spouse is a full-time student (for at least five months during which the employee worked)
  
  
• The employee's spouse is disabled and unable to care for herself or himself.
  
  

Eligible dependents include children under the age of 13 and any person the employee could claim as a dependent on his or her federal income tax return who is mentally or physically incapable of caring for himself or herself and lives in the household at least eight hours a day.

The specific expenses covered by the dependent care FSA are subject to Internal Revenue Service (IRS) guidelines. They include:

• Childcare expenses for children under the age of 13 at a childcare center, nursery school, day camp, or private sitter. Expenses for a private housekeeper apply if childcare is part of his or her duties.
  
  
• Pre-school and after-school childcare programs (tuition expenses are not eligible)
  
  
• Care for an adult dependent who lives with the employee for at least eight hours a day – care can be in the employee's home or at an outside facility
  
  

Because the employee uses pre-tax funds for childcare and similar services, the dependent care FSA reduces his or her federal and state income taxes. Plus, contributions come out of employees' paychecks automatically, so they know the money is there when needed. However, employees should plan their contribution amount carefully – unused dependent care FSA money is forfeited at the end of the plan year.

For every pay period, a portion of the employee's annual contribution is deducted from his or her paycheck. The available dependent care FSA balance increases by the amount deducted. That means, at any point during the year, an employee is only able to submit dependent care FSA claims equal to or less than the total amount deducted from his or her pay at that point. By the end of the plan year, total paycheck deductions will equal the total the employee chose to contribute.

When employees have eligible expenses, they pay them out of pocket and keep the receipt. To be reimbursed for these expenses from the dependent care FSA, the employee completes an FSA claim form and submits it with the receipts to the address or FAX number specified on the claim form.

The IRS limits how much an employee can put in a dependent care FSA. If the employee is single or married filing a joint federal income tax return, the IRS allows him or her to contribute up to $5,000 per year to a dependent care FSA. Married couples who file separate returns can each contribute up to $2,500 per year.

Tax savings example

Last year, Laura made $28,000 and put $1,500 in her dependent care FSA. The example below shows how much she saved by using the pre-tax money for qualified dependent care expenses. Without an FSA, she would have paid for these expenses from her take-home pay, which she paid taxes on.

Example of annual tax savings*	With FSA	Without FSA
Laura’s taxable income	$28,000	$28,000
Pre-tax money deposited into her FSA	-1,500	-0
Laura’s remaining taxable income	26,500	28,000
Minus federal and Social Security taxes	-9,447	-9,982
Take-home pay spent on qualified expenses	-0	-1,500
Laura’s remaining take-home pay	$17,053	$16,518

Putting pre-tax money in a dependent care FSA saves Laura $535 on her federal tax bill – plus she’ll save on state taxes as well.

* This example is intended to demonstrate a typical tax savings based on 28 percent federal and 7.65 percent FICA taxes. Actual savings will vary based on the individual's tax situation.