LANA: Jessie, I’m so excited to talk to you about Dependent Care Flexible Spending Accounts, or Dependent Care Accounts (DCAs) for short. People really need to know about this easy tool to help parents save on child care, especially right now with the cost of care being so high. DCAs are easy to use, but a little complex behind the scenes, and not all employers offer this benefit to their employees. I’m excited to have you help break it down for us. First though, I’m curious, when did you first learn about Dependent Care Accounts, and what makes you so passionate about spreading the word?
JESSIE: Knowing first hand the struggles parents face staying in the workforce or re-entering the workforce due to child care, this topic has always been one that hits home. So when the opportunity came forward to TASC by UW Institute for Research on Poverty, the City of Madison, and the Wisconsin Early Childhood Association, to participate in a community project focused on finding quality and affordable childcare, we leaned in and asked, “How can we help!?”
Given my relationship with TASC, I have an understanding of the tax-savings benefits employers offer their employees. Dependent Care Accounts being one of the benefits that I know can make a difference in a family budget.
But it wasn’t until we realized that of those parents who qualify for a Dependent Care FSA only 4% actually participate. We know there’s a tremendous opportunity for this program to make a difference for working families.
"We realized that of those parents who qualify for a Dependent Care FSA only 4% actually participate."
LANA: So what is a Dependent Care Account, and how does it work?
JESSIE: A Dependent Care Account allows you to set aside pre-tax money for child or dependent care related expenses while you or your partner are working, looking for work or attending school full-time. Money set aside in this account may be spent on child care services such as:
During open benefit enrollment, you may have the opportunity to elect, or choose, a Dependent Care Account. At that time, you choose an amount no greater than the IRS maximum. In 2022, the maximum yearly amount is $5,000 for joint-tax filing parents, and $2,500 for single-tax filing parents.
Let’s say you selected the maximum, because let’s be realistic, many families are spending at least that much every year on child care!
The employer will take the $5,000 and divide it by the number of times you get paid. Let’s say you get paid 26 times a year. Each paycheck you get will have $192.31 set aside into a Dependent Care Flexible Spending Account for child and dependent care related expenses.
LANA: So how does putting this money in a Dependent Care FSA help you save, since you are spending it either way?
JESSIE: Every time you get paid, you pay federal and state payroll taxes. All benefit premiums and pre-tax benefits, like a Dependent Care FSA will be withheld when payroll calculates the amount you owe in federal taxes. This means you owe less in federal taxes and get more take home pay!
LANA: How do you access the money in your Dependent Care Account?
JESSIE: The money you set aside in a Dependent Care FSA can be accessed via a debit card, or you can submit a claim for reimbursement along with a receipt through a desktop computer or through our mobile app. You can even use your smart phone’s camera now and take a picture of your child care bill, and just attach it to the request, and submit for reimbursement on the go. It’s so easy now, and if your employer uses TASC, it’s a 24-48 hour turn-around for reimbursement. But it’s good to keep in mind that with some programs it may take a week or more to receive your reimbursement.
LANA: Are there statistics about how much families save each year, or other positive impacts of using a Dependent Care Account?
JESSIE: Individuals will save around 30% on all eligible expenses when they use a pre-tax benefit account to pay for them. An employee who sets aside $5,000 in a Dependent Care FSA, and uses it on eligible expenses, will save, on average, $1,200. Sometimes the tax savings are much greater given your tax bracket. That’s $1,200 they would have normally paid in federal payroll taxes that is back in their pocket. You can use an FSA tax savings calculator TASC created to model your potential savings.
LANA: What are the benefits to employers?
JESSIE: An employer will save $382 in federal taxes with just one employee who elects to set-aside $5,000 for a Dependent Care FSA. The employer does incur administrative fees to make these accounts available, but it shouldn’t require more than a handful of fully participating employees for the employer’s federal tax savings to make it worth the administrative fees. TASC has created a calculator for employers too, to help show these savings.
LANA: Child care costs can change for a variety of reasons besides what is traditionally known as a “qualifying life event,” like marriage or divorce, or pregnancy and adoption. Are you able to change the amount you contribute to a Dependent Care Account if something about your child care situation changes during the year, or do you have to wait until open-enrollment?
JESSIE: Typically, yes, an individual can change their annual Dependent Care Account election amount whenever they have a change in cost or coverage along with the other life events that you just mentioned. This means that you don’t have to know exactly how much your child care will cost when you enroll. For example, if your provider increases their prices, or if you decide to enroll your child in a summer day camp, and it increases your child care costs, you can adjust the amount you put in the DCA accordingly.
I should note, however, there are times that employers don’t approve these changes, but it isn’t often. It’s best to check with Human Resources to understand exactly how the employer has set up the specific pre-tax benefit plan.
LANA: Keeping all the different employer benefits straight can be confusing. I have a broader question about how Dependent Care Accounts fit within an overall benefits package. Can you help us understand how a Dependent Care Flexible Spending Account is different from a Healthcare Flexible Spending Account and a Health Savings Account?
JESSIE: Absolutely, the first thing to understand would be a few key terms and what they mean. These benefits are often referred to as a cafeteria plan. Think of it as a la carte options at a buffet. An employee can choose what benefits to pick from the menu of options. All benefits on that specific menu are pre-tax benefits. If an employer offers a cafeteria plan it allows for an employee to exclude dollars in their paycheck from federal taxes (FICA) for:
That means the employee can save up to 7.5% of their elected amount when these funds are set aside before taxes are taken out of their paycheck.
As for the differences between them:
A Healthcare Flexible Spending Account allows you to set aside pre-tax money for medical related expenses from items as small as band-aids to larger expenses such as glasses, copays or coinsurance for surgery. There are thousands of items on the approved expense list that this money can be used for! Every year the IRS sets a new maximum amount that employees can set aside. In 2022, the maximum amount is $2,850 for a Healthcare Flexible Spending Account.
A Dependent Care Account as we’ve already discussed, is also a flexible spending account, but the eligible expenses are for child or dependent care, rather than health care. In 2022, the maximum amount is $5,000 for joint tax-filers and $2,500 for single tax-filers.
A Health Savings Account is typically paired with an eligible High Deductible Insurance Plan. That means as an individual you will pay a pre-tax monthly premium for the high deductible insurance plan, and you will also have the option to set-aside pre-tax dollars into a Health Savings Account for when or if you have a medical expenses (i.e. need bandaids or to pay expenses toward your deductible). Health Savings Accounts may make sense for some people, but not everyone. As an individual, you will want to assess how much you want to pay for healthcare and how often you would use the healthcare system to determine if the high deductible plan makes sense for you.
LANA: So if I am understanding correctly, Health Savings Accounts are only part of a qualifying plan with a high deductible, so most people won’t be able to even consider a Health Savings Account or HSA, while they could have a Healthcare Flex Spending Account or FSA?
JESSIE: Exactly. Many people won’t have the HSA option available to them because they don't have a Qualified High Deductible plan available to them because they're on an employer-sponsored insurance plan that offers a lower deductible.
LANA: Got it. Thanks for that overview. So, back to child care, do all employers provide Dependent Care Accounts?
JESSIE: No, unfortunately not.
LANA: Why not? Are there significant costs to an employer to provide a Dependent Care Account?
JESSIE: The amount of taxes saved typically outweighs the cost of these pre-taxed benefits, so it's unfortunate that all employers do not offer these plans to their employees.
LANA: What do you think the greatest benefit of providing a Dependent Care Account is for an employer?
JESSIE: All employers struggle with attracting and retaining top talent – this is a benefit that shows that you’re inclusive to working families and realize the value it brings to families to afford childcare.
LANA: Where can folks learn more about Dependent Care Accounts and are there resources they can share with their employers?
JESSIE: TASC has provided several resources that can help folks learn more, which I am happy to share. Information is also available on the IRS website.
LANA: Thanks so much for taking the time to talk with Parsley about Dependent Care Accounts. As our company grows, we are very excited to help users understand how they can save with this benefit and work with employers to better communicate about these savings with their employees.
Jessica has worked in the employer benefits administration industry for over twelve years. She's been in lock-step with TASC as they've grown over the years to be now more than 1,200 employees nationwide. Jessie brings her technical aptitude and industry knowledge to product development by spearheading many pilot programs that bring value-added benefits to our community. She has lived in the greater Madison, Wisconsin area for almost 20 years and can be seen with her family at the baseball diamonds and soccer fields, or walking their labradoodle.