Spending Accounts – A High Level Yet Somewhat Detailed Overview – Part Two

Hello! Welcome to part two of our article on Spending Accounts. As a reminder, in our last article, we discussed several common types of Spending Accounts – Health FSA’s and Limited Purpose FSA’s. If you missed that one, please
click here.

Dependent Care Flexible Spending Accounts (FSA’s)

This is a type of spending account that I believe is very underutilized. As someone whose child is just a few years into elementary school, I can’t tell you how excited we were when our daughter went to kindergarten and we were able to stop spending $1200+ a month on daycare. 

For this reason alone, I feel more employers should be offering this benefit. 

Why do I say that?

If you have employees with young children who are paying for childcare, it is very expensive, and they are already paying for it.

For something that is a known cost for most parents, why would you not give them a tool to help them lower their taxable income for a known, high-dollar expense each month?  

Even if it’s not something all your staff would want to do, those few people taking advantage of this will save a lot of money in tax liability, which is the point of most of these types of programs. If you have known costs, the federal government (through these different types of spending (and savings) accounts) allows regular people like you and me to pay for these expenses with dollars that are not taxed.

Details on the Dependent Care Flexible Spending Account (FSA)

Items allowed to be paid

Childcare expenses from a licensed provider (babysitters or family/friend caregivers are not eligible)

Summer camps, after-school care

Also, don’t forget about adult care expenses. If you have costs related to the daily care of an adult child, spouse, or even a parent, as long as they are tax dependent, you can also use this benefit for them. It doesn’t have to be for only your children. 

Is there an immediate max payout?

No, this is different from a Health or Limited Purpose FSA. Funds must be available to file claims (just like a bank account).

What are the maximum contributions allowed?

 $5000 per household (no change from 2022 to 2023)

Are there any immediate tax benefits?

Yes and no. Deductions can be set up to be removed from employees’ paychecks on a pre-tax basis meaning the expenses, once paid, get paid with pre-tax dollars; however, the funds are not available until the money is in the account (unlike Healthcare FSA’s).

Who are they funded by?

Most commonly, employees and employers can help fund the accounts as well.

What are the “gotchas”?

One main one, similar to what was previously stated:

  • This account is a “use it or lose it” program. If you put too much money into your Dependent Care FSA and can’t use it all up by the end of the plan year, you could be out those dollars. However, people who use these accounts tend not to have problems maxing out the value and getting the full benefit of claims paid and tax savings due to the high cost of child/adult care.

Thanks so much for following along, and please stay tuned for part three, where we will discuss Adoption Assistance Programs and Lifestyle Spending Accounts which I find very cool and hope you do as well. Should you have any questions about HSAs, FSAs, etc., we are always here to help! Drop us a line today!

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