Dependent Care FSA Grace Period: Deadlines, Rules, and Key Details

A Dependent Care Flexible Spending Account (FSA) allows employees to set aside pre-tax dollars for eligible childcare or eldercare expenses. These accounts operate on a “use-it-or-lose-it” basis, meaning unused funds may be forfeited at the end of the plan year. To offer flexibility, some employers provide a grace period that extends the time for using leftover funds.

Grace Period Eligibility Criteria

Not all Dependent Care FSAs include a grace period, as employers are not required to offer one. If available, this extension allows participants to incur eligible expenses for a limited time beyond the plan year-end. The IRS permits a grace period of up to 2 months and 15 days, meaning if a plan year ends on December 31, the grace period extends until March 15 of the following year. However, the exact duration depends on the employer’s plan, so employees should review their benefits documentation or check with HR.

Eligibility typically requires active participation in the FSA during the prior plan year. Employees who contributed to the account and had a remaining balance at year-end can use those funds during the extension. However, those who leave the company before the plan year ends or stop contributing mid-year may lose access to remaining funds unless they qualify for COBRA continuation, which is rare for Dependent Care FSAs. Some employers may also require employees to be actively employed when seeking reimbursement.

Key Deadlines and Timing

The grace period extends the time for incurring new expenses but does not affect the deadline for submitting claims, known as the run-out period. This period allows participants to file claims for expenses from both the plan year and grace period. Employers set this deadline, typically 30 to 90 days after the grace period ends.

For example, if a plan year ends on December 31 and the grace period extends until March 15, the run-out period might allow claims to be submitted until June 30. Missing this deadline results in forfeiting unused funds, as Dependent Care FSAs do not allow rollovers.

Qualifying Dependent Care Costs

Eligible expenses must directly relate to the care of a qualifying individual, as defined by the IRS. This includes children under 13 and dependents of any age who are physically or mentally incapable of self-care. The primary purpose of these expenses must be to enable the account holder and, if applicable, their spouse to work or seek employment.

Covered costs include daycare centers, nursery schools, and preschools that meet state licensing requirements. Nanny and babysitter wages qualify if the care is provided in the home, but payments to a spouse, the child’s parent, or another tax-dependent do not. Before- and after-school programs are reimbursable, but kindergarten tuition and higher-grade education costs are not.

Elder care expenses qualify if they pertain to an adult dependent who lives with the account holder for more than half the year and cannot care for themselves. This includes in-home attendants, adult daycare programs, and certain assisted living services, as long as they are not primarily medical in nature. If a caregiver also provides household services, only the portion related to dependent care is eligible.

Forfeiture of Unused Funds

Any balance remaining in a Dependent Care FSA after all deadlines have passed is forfeited under the IRS’s “use-it-or-lose-it” rule. Unlike Health FSAs, which may allow limited carryovers, Dependent Care FSAs do not permit rollovers. Employers retain forfeited amounts and may use them to offset administrative costs or redistribute them among participants per IRS guidelines.

A common reason for forfeiture is overestimating annual dependent care costs during open enrollment. Since contributions are fixed for the year and cannot be adjusted unless a qualifying life event occurs, participants who allocate too much may struggle to use the funds before the deadline. This is especially true for families with fluctuating childcare needs, such as school-aged children who only require care during summer months. Reviewing past expenses and budgeting carefully can help avoid losing funds.

Documentation for Reimbursement

Proper documentation is required for reimbursement, as the IRS mandates that all claims be substantiated with detailed records. Receipts or invoices must include the provider’s name, address, and taxpayer identification number (TIN) or Social Security number if the caregiver is an individual. The document should also specify the dates of service, the dependent’s name, and the exact amount paid. Credit card statements or bank transaction records alone are insufficient, as they do not confirm that the expense was for eligible dependent care. Some employers require a completed Dependent Care FSA claim form, which may also need to be signed by the provider.

For those using informal caregivers, such as a nanny or babysitter, obtaining proper documentation can be more challenging. Payments made in cash or without a formal receipt may not be reimbursable unless the caregiver provides a signed statement with the required details. Additionally, if a caregiver is considered a household employee, the participant must comply with tax reporting requirements, including issuing a Form W-2 and paying employment taxes. Keeping thorough records throughout the year can prevent last-minute issues when submitting claims.

Adjusting Allocations for Future Plan Years

Strategic planning of Dependent Care FSA contributions can help minimize the risk of forfeiting unused funds while maximizing tax savings. Since elections are made during open enrollment and are generally irrevocable unless a qualifying life event occurs, careful forecasting of dependent care expenses is necessary. Reviewing past spending patterns and anticipating changes in care needs can lead to more accurate allocations.

A key factor is whether a child will age out of eligibility during the plan year. If a child turns 13 mid-year, expenses incurred after their birthday will no longer qualify. Changes in work schedules, remote work arrangements, or a spouse leaving the workforce can also reduce dependent care costs, making a lower contribution more appropriate. Employees should also account for employer policies regarding grace periods and run-out periods when determining how much to set aside.

In some cases, comparing the tax benefits of a Dependent Care FSA with the Child and Dependent Care Tax Credit may be beneficial. FSAs provide upfront tax savings by reducing taxable income, while the credit allows a percentage of eligible expenses to be claimed. The credit rate is highest for lower-income households, with a maximum of 35% for those earning under $15,000, though it phases down to 20% for higher earners. Evaluating both options based on individual financial circumstances can help optimize overall tax savings.