Juggling work and family responsibilities can be a daunting task for most employees who are parents or caregivers. The financial burden of childcare or elder care can significantly impact quality of life. Fortunately, Dependent Care Accounts (DCAs) offer a tax-advantaged solution to help offset these costs.

What are Dependent Care Accounts?

Dependent Care Accounts are flexible spending accounts that allow eligible employees to set aside pre-tax dollars to pay for qualified dependent care expenses. This means that the money contributed to the account reduces an employee’s taxable income and is not subject to federal, state, or Social Security taxes, resulting in significant savings.

The IRS sets annual limits on the amount employees can contribute to their account each year. For 2024, the maximum contribution is:

  • $5,000 for individuals or married couples filing jointly
  • $2,500 for married individuals filing separately

When employees elect this type of plan, the effect is they save up to 30% on their expenses because the money they use has not had taxes taken out. It’s the whole dollar, pretax. Here’s a simplified example of how it could work:

$5,000 × 30% = $1,500 saved annually

Dependent Care Accounts offer numerous benefits to employers as well including:

  • Support employees with caregiving responsibilities: Even though dependent care can often be much more than $5,000 annually, a Dependent Care Account can reduce employee stress related to caregiving costs, potentially leading to higher job satisfaction and productivity.
  • Enhanced benefits package: Attract and retain top talent in a competitive job market.
  • Reduced payroll taxes: As with other pre-tax benefits, offering a Dependent Care Account lowers employees’ salaries, and lowers payroll taxes.

Who is Eligible?

To qualify for a Dependent Care Account, employees must have a dependent who meets one of the following criteria:

  • Child under 13 years old, including biological, adopted, or foster children.
  • Adult dependent, including a spouse, parent, or other relative who is unable to care for themselves due to a physical or mental disability.

Getting Started

  1. Plan Setup: Hire a knowledgeable benefits administrator to create a Dependent Care Account for your employees. Managing this often complex benefit while staying compliant with IRS regulations is best left to the experts.
  2. Election: During the open enrollment period, employees can elect a specific amount to contribute to their dependent care plan. They should allocate only the funds that they have estimated to spend during the calendar year. This amount is typically deducted from their paycheck on a pre-tax basis through payroll.
  3. Plan Duration: Elections are in place for the Employer’s Dependent Care Plan year. Employees can only make changes if there’s a Qualified Event, such as a change in family or employment status, or if an employee’s dependent care rate or provider changes.
  4. Reimbursing Employees: As eligible expenses are incurred, employees must submit a claim to their employer or a benefits administrator along with proof of payment. Expenses must be submitted in the form of a receipt with the following criteria:

    • Name of Provider: If daycare does not provide receipts with their company insignia, employees can use a Dependent Care Receipt Form provided by their benefits administrator. The daycare provider must fill out the certification section to be eligible.

    • Federal Identification: The Federal ID or Social Security number of the daycare provider must be provided on every claim submitted for reimbursement.

    • Dates of Service: Expenses must be incurred during the Plan Year and receipts must show the dates of the service.

    • Amount of Expense: The claim will be for the service paid for during the dates of service above.

Dependent Care Accounts reimburse “dollar-for-dollar” based on year-to-date payroll deductions. For example:

  • If you submitted $250 in dependent care expenses but only $200 had been deducted by the processing date, you would receive a reimbursement for only $200. However, as more funds are deducted and posted to your account, you would receive reimbursements for submitted expenses.

What Expenses are Eligible?

According to the IRS, eligible expenses for Dependent Care Accounts can be used to pay for a wide range of dependent care expenses, including:

  • Childcare: Daycare, preschool, before- and after-school care, and summer camps
  • Tuition fees: Nursery or preschool
  • Registration Fees and deposits
  • In-home care: Nannies, babysitters, and au pairs
  • Elder care: Services for adult dependents who need assistance with daily living activities due to mental or physical disabilities
  • Summer day camps: If the primary purpose is childcare, not education

What Expenses are not Eligible?

Some expenses under Dependent Care are not allowed for reimbursement:

  • Overnight Camp
  • Kindergarten or primary school tuition
  • Fees paid to a caregiver who is also a dependent
  • Cost of classes, field trips, special events, clothing and meals charged over the normal day care expenses
  • Elder care, unless tax dependent-not for medical care
  • Fees for late payment of care expenses

Additional Tips for Maximizing Dependent Care Accounts

  • Keep detailed records: Maintain documentation of all eligible dependent care expenses to support your claims.
  • Review your election: Periodically review your contribution to ensure it aligns with your current needs. Make adjustments, such as adding in summer day camps, if you are far from meeting your annual election.

Lower Taxes for All

A Dependent Care Account can be a valuable tool for employees to manage dependent care expenses and reduce their overall tax burden. Likewise, as an employer, you too can realize tax benefits when you make informed decisions about whether this type of benefit is right for your employees.

To learn more about Dependent Care Accounts and if they’re right for your business, contact Flyte today for a no-pressure demo of our benefits administration services.