Dependent Care FSA Contribution and Income Limits

A Dependent Care Flexible Spending Account (DCFSA) is an employer-sponsored benefit allowing employees to set aside pre-tax money from their paychecks. These funds can be used to pay for qualified care expenses for children and other dependents. Understanding the contribution and income-related limitations is important for using this account effectively.

Contribution Limits

The Internal Revenue Service (IRS) establishes the maximum amount that can be contributed to a Dependent Care FSA each year. The contribution limit is $5,000 for a household, which applies to individuals filing as single, head of household, or married filing jointly. This $5,000 is a household limit, not a per-person limit.

If a married couple files jointly, their combined contributions to their respective DCFSAs cannot exceed the $5,000 total. For example, if one spouse contributes $3,000 to their DCFSA, the other spouse can only contribute a maximum of $2,000. This requires coordination between spouses to avoid going over the combined household maximum.

A different rule applies to married individuals who file taxes separately. In this scenario, the contribution limit is $2,500 per person. Unlike the health FSA, the DCFSA contribution limit is not indexed for inflation and has remained at this level for many years.

Understanding Income-Related Limitations

While there are no upper-income thresholds that disqualify an individual from participating in a DCFSA, an “earned income” limitation can reduce the maximum allowable contribution. This rule states that your total DCFSA contribution cannot exceed the lesser of several amounts: the statutory limit of $5,000 (or $2,500 if married filing separately), your own earned income for the year, or your spouse’s earned income for the year.

The earned income rule means the lower-earning spouse’s income sets the ceiling for the household’s total contribution. For instance, if a married couple files jointly and one spouse earns $75,000 while the other earns $4,500 from a part-time job, their maximum allowable DCFSA contribution is capped at $4,500, the earned income of the lower-earning spouse.

The IRS provides a provision for a spouse who does not have earned income because they are a full-time student or are physically or mentally incapable of self-care. In these cases, the non-working spouse is considered to have a “deemed” earned income for this calculation. For one qualifying dependent, this amount is $250 per month ($3,000 annually), and for two or more, it is $500 per month ($6,000 annually). While the deemed income for two or more dependents is $6,000, the household’s contribution is still capped at the $5,000 annual limit.

Defining Qualifying Dependents and Expenses

To use DCFSA funds, the expenses must be for the care of a “qualifying person.” The IRS defines this as your dependent child who was under the age of 13 when the care was provided. It also includes a spouse or any other tax dependent who lived with you for more than half the year and was physically or mentally incapable of caring for themselves.

The care provided must be for the purpose of allowing you and your spouse to work or actively look for work. Expenses for care while you are not working, such as during a leave of absence, are not eligible for reimbursement. Qualifying services include:

• Payments to daycare centers
• Preschool programs
• Nannies
• After-school programs
• Summer day camps

Certain expenses are explicitly excluded from being paid with DCFSA funds. The cost of tuition for kindergarten and higher grades is not a qualifying expense. Overnight camps do not qualify, as the overnight portion is not considered work-related care. Enrichment activities, such as music lessons or sports camps, are also ineligible.

Handling Excess Contributions

Contributing more to a Dependent Care FSA than is legally permitted has tax consequences. Any amount contributed beyond the established limits—whether the statutory limit or the earned income limit—is considered an excess contribution. This excess amount is not tax-free and must be included in your taxable wages for the year.

If an individual contributes more than the allowed limit through a single employer, the employer will correct this by including the excess amount as taxable wages in Box 1 of the employee’s Form W-2.

A common reason for over-contributing occurs when a married couple collectively contributes more than the $5,000 household limit through their separate employers. In this case, the individual employers would not be aware of the household overage. The couple is then responsible for reporting the excess contribution as taxable income on their tax return. Failing to report these excess contributions can lead to underpayment of taxes and potential penalties.