How Does a Dependent Care Flexible Spending Account Work?

A Dependent Care Flexible Spending Account (FSA) helps employees manage certain dependent care costs. It is an employer-sponsored benefit designed to help individuals pay for eligible dependent care services using pre-tax dollars. This arrangement effectively reduces an employee’s taxable income, leading to potential tax savings on funds allocated for care. The primary purpose of a Dependent Care FSA is to assist employees in covering expenses that enable them to work, seek employment, or attend school full-time.

Eligibility and Enrollment

Participation in a Dependent Care FSA is contingent upon your employer offering this benefit as part of their employee benefits package. The funds within the Dependent Care FSA are specifically for expenses that allow the employee, and their spouse if married, to work or look for work.

For this FSA, a “dependent” refers to a child under the age of 13. This also includes a spouse or another dependent of any age who is physically or mentally incapable of self-care and resides in your home for at least eight hours a day.

Employees enroll in a Dependent Care FSA during their employer’s annual open enrollment period. However, enrollment may also be possible outside this window if a qualifying life event occurs, such as marriage, divorce, birth or adoption of a child, or a change in employment status. Once enrolled, participants authorize their employer to withhold a specified amount from each paycheck, which is then deposited into the FSA.

Contributions and Eligible Expenses

Contributions to a Dependent Care FSA are made with pre-tax dollars, meaning the money is deducted from your paycheck before taxes are calculated. This reduces your taxable income, leading to tax savings. The Internal Revenue Service (IRS) sets annual limits on contributions to these accounts. For 2025, the maximum contribution is $5,000 per household, or $2,500 if you are married and filing separately. This limit applies to the combined contributions from both the employee and any employer contributions.

Eligible expenses for a Dependent Care FSA are those incurred for the care of a qualifying dependent. Common eligible expenses include fees for daycare, preschool, and before- and after-school programs. Nanny or au pair services are also covered for the care provided, but not for general household duties. Summer day camps for children under 13 are eligible, but overnight camps are not.

Care for a disabled spouse or dependent of any age who is physically or mentally unable to care for themselves also qualifies. However, certain expenses are not eligible for reimbursement. These include educational expenses such as kindergarten tuition or tuition for grades one and above, medical care, and household services unrelated to the dependent’s care. For a comprehensive list of eligible expenses, taxpayers can refer to IRS Publication 503.

Claiming Reimbursement

Once eligible dependent care expenses are incurred, employees can seek reimbursement from their Dependent Care FSA. The process involves submitting a claim to the plan administrator, often through online portals, mobile applications, or traditional paper forms.

To process a claim, specific documentation is required to verify the expense. This includes receipts or invoices from the care provider. The documentation should contain the provider’s name, address, and tax identification number or Social Security number, along with the dates of service and the amount paid.

After a claim is submitted and approved, reimbursement occurs within a few business days or weeks. Funds are commonly disbursed through direct deposit into your bank account or via a check. You pay for the services first and then seek reimbursement, as Dependent Care FSAs are not “pre-funded” accounts where you spend directly from the balance.

Understanding Unused Funds

A characteristic of Dependent Care FSAs is the “use-it-or-lose-it” rule. Any funds remaining in your account at the end of the plan year are forfeited and do not roll over to the next year.

Some plans may offer a grace period, which allows participants an extended timeframe, up to 2.5 months after the plan year ends, to incur and claim eligible expenses. Unlike Health FSAs, Dependent Care FSAs do not permit the carryover of unused funds.

Careful estimation of anticipated dependent care expenses is advisable to avoid forfeiture of funds. It is important to contribute an amount that accurately reflects your expected eligible expenses for the year.