Dependent Care FSA for Preschool: What Parents Need to Know

Paying for preschool can be costly, but a Dependent Care Flexible Spending Account (FSA) helps reduce expenses by using pre-tax dollars. This lowers taxable income and makes childcare more affordable. Understanding how the account works is key to maximizing its benefits.

Eligibility Criteria

To qualify for a Dependent Care FSA, parents must meet IRS requirements. The account is available to those who incur childcare costs while working or looking for work. In a two-parent household, both parents must be employed, actively job-seeking, or full-time students. If one parent stays home without earning income, the family typically does not qualify.

The child must be under 13 and live with the account holder for more than half the year. Preschool-aged children meet this requirement, but once they turn 13, their care expenses become ineligible. The child must also be claimed as a dependent on the parent’s tax return.

Employers must offer a Dependent Care FSA for parents to participate. Each company may have specific rules regarding eligibility, such as requiring a minimum number of hours worked per week. Reviewing the employer’s benefits package is necessary to understand these details.

Contribution Limits

The IRS sets an annual contribution limit of $5,000 per household for married couples filing jointly or single parents. If married and filing separately, each spouse can contribute up to $2,500. Contributions are made through payroll deductions and are only accessible as they accumulate.

If both spouses have access to a Dependent Care FSA, their combined contributions cannot exceed the household limit. Exceeding this amount results in excess contributions being treated as taxable income. Additionally, Dependent Care FSAs follow a “use-it-or-lose-it” rule, meaning unused funds at the end of the plan year are forfeited unless the employer offers a grace period.

Qualified Preschool Costs

Dependent Care FSA funds can be used for preschool expenses if they directly support childcare while the parent is working. This includes tuition for licensed preschools, nursery schools, and daycare centers that provide both educational and custodial services. The IRS does not require an academic curriculum, but the program must offer care beyond occasional babysitting.

Required fees such as registration, activity, and supply costs may be eligible if they are mandatory for attendance. A non-refundable deposit may also qualify if the child ultimately attends. However, optional expenses like extracurricular programs or enrichment classes not tied to care are ineligible.

Extended care services, such as before- and after-school programs, qualify if they enable the parent to work. For example, early drop-off or late pick-up fees at a preschool may be reimbursed.

Non-Eligible Expenses

Kindergarten and higher educational programs are not covered, even if they include childcare elements, as Dependent Care FSAs are intended for custodial care rather than education.

Payments to non-qualifying caregivers are also ineligible. Family members under 19 or those claimed as dependents cannot be reimbursed. Payments to a spouse or parent for childcare are similarly excluded.

Enrollment Periods

Enrollment in a Dependent Care FSA is limited to an employer’s annual benefits selection period. Parents must elect their contributions for the upcoming year during open enrollment. Changes are generally not allowed unless a qualifying life event occurs, such as a change in employment, marital status, or dependent care needs.

If a parent starts a new job with a Dependent Care FSA or transitions a child from in-home care to preschool, they may be eligible to adjust contributions outside the usual period. Employers typically require documentation, and adjustments must be made within a specified timeframe, often 30 to 60 days from the event.

Documentation and Reimbursement

To receive reimbursement, parents must provide documentation proving expenses were for eligible childcare services. This includes receipts or invoices with the provider’s name, address, tax identification number, service dates, and amount paid. Without this information, claims may be denied.

Many employers require claims to be submitted by the end of the plan year or within a short grace period. Some plans offer a reimbursement debit card, allowing direct payments to providers, though documentation may still be required. Keeping thorough records ensures compliance with IRS guidelines and avoids potential claim denials.