How Does a Dependent Care Flexible Spending Account Work?

One of the employee benefit options your employer may offer is a dependent care flexible spending account (FSA). This type of account allows you to set aside pretax dollars to pay for the cost of caring for a child or other dependent so you can work. The contributions you make to a dependent care FSA are before federal and state income tax and social security and Medicare taxes, so the tax savings can be substantial.

To be able to take advantage of the tax savings offered by this type of FSA you must have a qualified dependent. This could be a child under age 13 who you can claim as a dependent, your spouse, or other dependent, such as a parent who is physically or mentally incapable of caring for him or herself.

The amount you can contribute to a dependent care FSA depends on your income and your spouse's income if you are married. If you are single and you earn more than $5,000 a year, you can contribute up to $5,000 to a dependent care FSA. If you earn less than $5,000 you can contribute an amount up to your earned income.

If you are married filing jointly the amount you can contribute depends on your income and your spouse's income. If you both earn over $5,000, you can contribute up to $5,000 to your dependent care FSA. If you earn more than $5,000 but your spouse earns less than $5,000, you can contribute an amount up to your spouse's earned income.

If you are married filing separately, you can contribute up to $2,500 if your earned income is more than that amount. If it is less, you can contribute an amount up to your earned income.

You should carefully plan the amount you contribute to a dependent care FSA since you lose any amount in the account that you do not use by the end of the plan year or any applicable grace period. Generally, you choose the amount you want to contribute for the whole year, and this amount is divided by the number of pay periods to determine the amount to be deducted from your paycheck each period.

You should follow the instructions indicated by your dependent care FSA plan, but generally as you incur dependent care expenses, you would submit your receipts with a claim for reimbursement, and the plan would reimburse you from the funds in your account.

When you have a dependent care flexible spending account, you should file Form 2441, Child and Dependent Care Expenses when you file your annual federal income tax return. The contributions to the dependent care FSA that are deducted from your pay are reported in box 10 of your W-2 statement.

Sources:

Dependent Care Flexible Spending Account, Cafeteria Plan Advisors

Dependent Care FSA, Aetna

Form 2441, Child and Dependent Care Expenses, IRS

Form W-2, Wage and Tax Statement, IRS

FSA Dependent Care, Tri-Ad

Instructions for Form 2441, IRS