Can an Employer Contribute to a Dependent Care FSA?
Explore how employer contributions to a Dependent Care FSA work, including their effect on the combined annual limit and the tax implications for all parties.
A Dependent Care Flexible Spending Account (DCFSA) is an employer-sponsored benefit that allows employees to set aside money on a pre-tax basis. These funds are for qualified dependent care services necessary for an employee, and their spouse if applicable, to work or look for work. Eligible expenses include costs for daycare, preschool, and before or after-school programs for a child under the age of 13. The account can also cover care for a spouse or other dependent who is physically or mentally incapable of self-care.
Understanding Contribution Limits
An employer can contribute to an employee’s DCFSA, but these contributions are not in addition to the employee’s limit set by the Internal Revenue Service (IRS). Instead, both employer and employee contributions count toward a single, combined maximum. For 2025, this annual limit is $5,000 for individuals or married couples filing jointly and $2,500 for those married filing separately.
For example, if an employee is eligible for the $5,000 limit and their employer contributes $1,000, the employee can only contribute an additional $4,000 from their pre-tax earnings.
Employees should coordinate with their spouse if both have access to a DCFSA. A married couple filing jointly shares one $5,000 limit, regardless of whether one or both spouses contribute. If both spouses elected the maximum in their separate plans, their combined $10,000 would create a $5,000 excess with tax consequences.
Tax Implications for Employees and Employers
Employer contributions to a DCFSA are generally excluded from an employee’s gross income, meaning they are not subject to federal income or FICA taxes. This tax-free status applies as long as the combined contributions do not surpass the annual IRS limit. Any excess amount is reported as taxable wages on the employee’s Form W-2.
For the employer, the financial advantage of contributing to a DCFSA comes from payroll tax savings. Both employer and employee contributions are excluded from the wage base for calculating FICA and FUTA taxes. This exclusion reduces the employer’s overall payroll tax liability, offering an incentive to provide the benefit.
Employer Plan Considerations
An employer’s decision to contribute to a DCFSA and the method for doing so must be detailed in the official plan documents. These documents outline the plan’s rules, including eligibility and the structure of employer funding. Without this formal language, contributions could be considered non-compliant.
Employers can structure their contributions in several ways. Some may offer a “seed” contribution, a fixed dollar amount provided to all eligible employees, regardless of their own contributions. Another method is a matching contribution, where the employer matches a percentage or dollar amount of the employee’s pre-tax contributions to incentivize participation.
A compliance requirement for employer-sponsored DCFSAs is nondiscrimination testing. These IRS-mandated tests ensure the plan does not disproportionately benefit highly compensated employees (HCEs) over the general employee population. The purpose is to verify the plan is equitable in its availability and use across different compensation levels. Failure to pass these tests can result in the benefits for HCEs becoming taxable.