I Looked Into Opening a Dependent Care FSA. Here are the Pros and Cons

Rawpixel/Getty Images

When you’re looking for a job, one of the main things to consider is the types of benefits offered by an employer. Of course, health insurance is a top priority for most Americans, as well as a 401(k) or similar retirement plan. Many employers go a step further by offering savings plans to pay for health expenses (FSAs and HSAs, or flexible/health savings accounts).

If you’re lucky, you might find an employer who offers something called a Dependent Care FSA. Not to be confused with a health savings account, a Dependent Care FSA can help you pay for expenses such as childcare or adult day care.

As a working parent with a kid in day care and another on the way, I was intrigued by the idea of the Dependent Care FSA. To learn more, I spoke with Bill Sweetham, legislative and technical director at the Employers Council on Flexible Compensation.

What is a Dependent Care FSA, Anyway?

According to Healthcare.gov, a flexible spending account is a tax-free way to save money for healthcare costs. Similar to a 401(k), you pay pre-tax money into an FSA, and your employer may or may not match it up to a certain percentage. FSAs are useful if you expect to incur a lot of health-related out-of-pocket costs.

A Dependent Care FSA is similar in that you pay into it pre-tax. But this type of FSA is meant to cover child care or adult day care rather than health expenses. It’s an easy way to stick to a budget for child or adult care expenses; according to Sweetham, “You simply make an election to reduce your pay and have it contributed to the FSA automatically every pay period.”

A Dependent Care FSA covers the costs for either a licensed day care center or a private individual. However, there are exceptions.

“The care cannot be provided by one of your dependents, meaning that any payment you made to any older children that watched your younger children while you were at work could not be reimbursed from your Dependent Care FSA,” Sweetham explained. Your claims might also be checked before you get reimbursed to make sure your expenses are legitimate.

For those of us with kids in day care, though, a Dependent Care FSA would be a huge help in paying for that service.

Sweetham listed some of the most common expenses covered by Dependent Care FSA. Check with your provider to see which of the following are eligible:

  • Before and after-school care
  • Preschool or nursery school
  • Extended day programs
  • Au pairs, nannies and babysitters
  • Summer day camp
  • Elder day care

There are a few other important rules to note when it comes to using funds from a Dependent Care FSA. I asked Sweetham to elaborate.

“The care must be for either dependent children under the age of 13 who live with you for more than half the year, your spouse or other qualifying dependents who are physically or mentally incapable of self-care and live with you for more than half the year,” he explained.

If you’re separated and only have custody of your child on certain days, you may not be able to use the funds to pay for care.

Only certain individuals can opt for a Dependent Care FSA. If you have a job, are looking for a job or are in college, you should be fine, but if you don’t fall into these categories you won’t be eligible for reimbursement.

The Benefits in a Dependent Care FSA

Elder people socialize at a living facility for seniors.
CasarsaGuru/Getty Images

Now that I understood more about what a Dependent Care FSA is and what it covers, I asked Sweetham to tell me about some of the benefits.

“Since day care can be one of the single largest expenses for a family with children or with an incapacitated family member (e.g., an elderly parent), employees may want to consider participating in the Dependent Care FSA offered by their employer,” explained Sweetham.

This puts a Dependent Care FSA in a similar category to a 401(k), but without the employer match. You can determine the amount you want to contribute per pay period — up to $5,000 per year.

Drawbacks of a Dependent Care FSA

As with most things, I expected Dependent Care FSAs to have some cons. Sweetham explained a couple to me.

“You will have to let the dependent care administrator know how the money is spent to receive a reimbursement from the Dependent Care FSA,” he said. This means more work for you but is ultimately worth the inconvenience.

“Many administrators provide helpful ways for employees to meet these substantiation requirements,” he continued.

If you’re not sure how to find these resources, ask your employer’s benefits department for assistance.

If you don’t use all the money in your Dependent Care FSA in a given year, you’ll lose out.

Rollovers aren’t allowed with a Dependent Care FSA, Sweetham explained. This makes them different from health FSAs, which typically allow you to roll over leftover cash to the next year.

“However,” he said, “Our members say that most people use all their money in the Dependent Care FSA and don’t forfeit any funds because employees can anticipate what their dependent care expenses are at the beginning of the year when they make their salary reduction election.”

Before deciding how much to contribute per paycheck, do the math to determine how much you’ll be paying for care during the year, and base your contribution on that number. This way you’ll likely use all the funds for dependent care expenses and not leave money on the table.

How to get a Dependent Care FSA

Unfortunately, the only way to obtain a Dependent Care FSA is if your employer offers the benefit, Sweetham said. The U.S. Bureau of Labor Statistics found that only 39% of American civilian workers had access to Dependent Care FSAs through their employers in 2014, the last year a study was issued.

Sadly for me, neither me or my husband’s employer offers a Dependent Care FSA at this time, so it’s not a benefit we can use (though if it was possible to get one in another way I’d jump at the chance).

Day care, whether for children or adults, can be expensive and place a huge burden on working families. A Dependent Care FSA can help you save money on these expenses. Check with your employer to see if this is something that’s available to you.

Catherine Hiles is a manager and a mother who will soon spend half her paycheck on day care for her two children. To help pay for this, she does freelance writing in her spare time and is always on the lookout for bargains.