By: Edward J. Leach, MBA, CFP®
In talking with clients about the benefits their employer provides during the open enrollment season, one often overlooked benefit if clients have dependents is the Dependent Care Flexible Spending Account (FSA).
A Dependent Care FSA allows employees to set aside a portion of their salary pre-tax to cover eligible dependent care expenses. It is offered as part of an employer-sponsored benefits package.
Here are some frequently asked questions and answers regarding Dependent Care FSAs:
What is the benefit of using a Dependent Care FSA?
Employees can contribute a portion of their salary to their Dependent Care FSA pre-tax. This means that the money contributed to the FSA is not subject to federal income tax, Social Security tax, or Medicare tax, resulting in potential tax savings.
You can submit claims to the FSA administrator for reimbursement when you incur eligible dependent care expenses. Reimbursements are typically tax-free if they are used for qualified expenses.
What are eligible dependent care expenses?
Dependent Care FSAs can pay for qualified dependent care expenses, such as childcare, preschool, before and after-school programs, summer day camps, and adult daycare services. The care must be necessary to allow you and your spouse (if applicable) to work, look for work, or attend school full-time.
How much money can I put into a Dependent Care FSA
The IRS sets annual contribution limits for Dependent Care FSAs. The maximum annual contribution limit in 2024 is $5,000 for married couples filing jointly and $2,500 for individuals or married individuals filing separately. These limits may be adjusted periodically for inflation.
What happens if I don't use the funds in the Dependent Care FSA?
Unfortunately, this account is subject to the "use-it-or-lose-it" rule. This means that any funds contributed to the FSA must be used within the plan year or any grace period provided by the employer. Funds left unspent at the plan year's end or grace period are forfeited.
Can anyone participate in a Dependent Care FSA?
You can only participate in a Dependent Care FSA if your employer offers one as part of their benefits package. Your employer will provide information on enrollment, contribution limits, and how to submit claims.
Does this have anything to do with my Health Flexible Savings Account (FSA)?
It's important to note that Dependent Care FSAs are separate from Health FSAs, which are used to cover eligible medical expenses. Be sure to review your employer's specific FSA plan details and consult with your HR department or FSA administrator to understand the rules and guidelines that apply to your plan.
If you think a Dependent Care Flexible Savings Account (FSA) is something you should consider or have questions about the other benefits your employer provides, please reach out to your Advisor.
Ed Leach, CFP®, MBA, is a Partner and Wealth Advisor at HIGHLAND Financial Advisors, LLC in Wayne, NJ, and works directly with clients advising them on their financial planning and investments. Ed’s work focuses on the unique needs of business owners, helping them extract value from their businesses while creating efficiencies in their business and personal financial plans. He is also a member of NAPFA, which is dedicated to serving fee-only advisors.