A Dependent Care Flexible Spending Account, or FSA, is a pre-tax benefit account used to pay for dependent care services while employees are at work. Employees can use the account to help pay for child care, preschool, summer camps, and before and after-school programs that are not sponsored by their employer. Money contributed to a Dependent Care FSA is not subject to payroll taxes, so employees who contribute pay less in taxes and take home more of their paycheck.
Employers can contribute to their employees’ Dependent Care FSAs, but there are maximum total contribution limits. Typically, those limits are $5,000 for single taxpayers and married couples filing jointly or $2,500 for married people filing separately.
Dependent Care Expense Accounts (DCEAs) are similar to Dependent Care FSAs;
Dependent Care Expense Accounts (DCEAs) are similar to Dependent Care FSAs; however, DCEAs cover not only child care but also other expenses for dependents, such as care of elderly or disabled relatives.
In 2021, just 39% of private industry employees in the U.S. had access to a dependent care flexible spending account. Yet FSAs and DCEAs offer a low-cost solution for employers. You need only the organizational systems and processes to operate them, which are inexpensive. As an added incentive, employee contributions to their FSAs or DCEAs reduce your FICA tax liabilities.
One note: Typically, employees pay for care out-of-pocket and then are reimbursed through their FSA or DCEA accounts. This can be challenging for employees who cannot afford the cost of care out-of-pocket, so employers should consider offering additional support in conjunction, such as vouchers or subsidies.