What is Dependent Care FSA?

What is Dependent Care FSA?
A dependent care FSA is a pretax benefit account used to pay for dependent care services. Here's a guide on how to get started offering them for your employees.
by Meredith Galante Nov 20, 2018 — 3 min read
What is Dependent Care FSA?

This article doesn’t constitute legal advice. Please consult a lawyer or an accountant in your state to learn more about minimum wage legislation as it applies to your business.

Offering health care benefits for your employees can contribute to their well-being and their families’, as well as that of your business. You’re probably already familiar with different kinds of health care benefits and retirement planning, however, a benefit that fewer people are familiar with (but gives your employees additional means to care for their families) is a dependent care flexible spending account (DCFSA).

A dependent care FSA is a pretax benefit account used to pay for dependent care services. It allows employees to save and spend on care services like preschool, summer day camp, after-school programs, and daycare for children or adults.

As an employer, offering a dependent care FSA can allow you and your employees to take advantage of tax benefits. The expenses are reimbursed pretax, reducing the amount of income tax you and your employees have to pay.

A reduction in your employees’ financial burdens can help relieve their stress and allow them to engage more in their work. And, like most benefits, offering a DCFSA may help improve employee retention. (And for a lot of employers, that’s the most important objective of providing benefits.)

How does a dependent care FSA work?

At the beginning of each calendar year, employees decide how much money they want to contribute throughout the year, within some limits. A portion of that amount will be deducted from each paycheck before taxes are taken out.

In 2018, the maximum you can contribute to your DCFSA pretax is:

What can you spend dependent care FSA funds on?

FSA funds can only be used for a dependent younger than 13 years old, a spouse who is unable to work or care for themself, or another adult who can not care for themself who you claim as a dependent on your taxes.

You can only use the money for bills that meet the IRS definition of eligible dependent care service. Here is some of the criteria you must meet (see the IRS website for more info):

You can use the funds toward reimbursement for qualified eligible expenses, such as:

What can’t you spend DCFSA funds on?

There are, of course, limits to what you can spend DCFSA funds on. Costs that aren’t qualified expenses include:

What to consider when thinking about DCFSA

Before you roll out a DCFSA benefit to your team, there are a few nuances to consider and inform your employees about:

DCFSAs have a use-it-or-lose-it policy.

This means that any money transferred into the FSA account during that calendar year must be used by the end of the year. Those funds don’t roll over. It’s important for employees to budget and think about how much money they intend on using each year, which will allow them to be as precise as possible.

DCFSAs are not prefunded.

That means you can be reimbursed only up to the amount that was deducted from your paycheck.

DCFSA expenses need be reported on tax returns.

Make sure you’re aware of the credits you can take for dependent care and how a DCFSA affects that.

You can only make changes with a qualifying event.

Your employees can only change the amount they put in an FSA within a 31-day window of a qualifying life event, such as getting married or having a child.

If you use an automated payroll system, like Square Payroll, with pretax benefits partner Alice, then DCFSA contributions should be calculated for you automatically when employees specify contributions. If you don’t use Alice, Square Payroll can take care of taxability and reporting, but it won’t calculate contributions and limits for your business.

Square Payroll also determines the taxability and reporting requirements for each benefit to make sure your taxes and tax forms are accurate.

Learn more about adding benefits and pretax contributions to your payroll runs in our Support Center.

Meredith Galante
Meredith Galante is a freelancer writer based in New York City. She's been writing for Square since 2017 where she's covered everything from the best software for restaurants to use to maximize profit, minimum wage laws across the country, and tips for entrepreneurs to maximize their impact.


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