How to Use an FSA for Daycare Expenses

A Flexible Spending Account (FSA) helps families save on daycare costs by using pre-tax dollars for eligible expenses, reducing taxable income and overall tax liability. To maximize its benefits, understanding contribution limits, reimbursement rules, and spending deadlines is essential.

Determining Eligibility

Not all daycare expenses qualify for reimbursement. Under IRS guidelines, care must be necessary for the parent or legal guardian to work or seek employment. If one parent stays home full-time, expenses generally don’t qualify unless that parent is a full-time student or has a disability preventing them from working.

Eligible dependents must be under 13 or, if older, physically or mentally incapable of self-care and live with the taxpayer for more than half the year. Qualifying care providers include licensed daycare centers, in-home babysitters, nannies, and certain summer day camps. However, overnight camps, tutoring, and educational programs do not qualify. Payments to a spouse or the child’s other parent are also not allowed.

Setting Up Contributions

Deciding how much to contribute requires planning, as unused funds are forfeited at the end of the plan year. The IRS sets an annual contribution limit of $5,000 per household or $2,500 for married individuals filing separately in 2024.

Employers require participants to select their annual contribution during open enrollment, with changes allowed only for qualifying life events like marriage, divorce, birth of a child, or a change in employment. Contributions are deducted pre-tax from each paycheck and spread evenly throughout the year.

Estimating annual daycare costs accurately helps avoid over-contributing. Reviewing past expenses and considering predictable changes, such as a child starting school or moving to part-time care, can help determine a reasonable amount. Some employers provide online calculators, and financial advisors can offer guidance based on a household’s tax situation.

Submitting Expenses

Submitting claims for reimbursement requires following the employer’s FSA administrator’s process. Most administrators offer online portals or mobile apps, while others require paper forms. Ensuring expenses meet eligibility criteria before submission prevents delays or denials.

Reimbursement requests must include the provider’s name, amount paid, date of service, and a description of the care provided. Unlike a Health FSA, where funds are available at the start of the plan year, a Dependent Care FSA operates on a cash basis—claims are reimbursed only up to the amount currently available in the account. If a claim exceeds the balance, the remainder is reimbursed as additional contributions are added.

Many FSAs require expenses to be submitted within a specific period after they are incurred. Some plans allow a grace period of up to 2.5 months after the plan year ends, while others impose stricter deadlines. Checking the employer’s policy ensures eligible expenses are reimbursed before any remaining funds are forfeited.

Required Documentation

Accurate record-keeping is essential for reimbursement. Administrators require specific documentation to verify expenses, and the IRS mandates that taxpayers retain these records in case of an audit.

A valid receipt or invoice must include the caregiver’s name, address, Taxpayer Identification Number (TIN) or Social Security Number (SSN), dates of service, amount charged, and a description of the care provided. If a provider does not issue an itemized receipt, requesting a formal statement helps avoid complications. Some FSA administrators may also require a signed affidavit from the provider confirming payment.

For informal caregivers like nannies or in-home babysitters, additional documentation may be needed. Since expenses must be reported on a tax return using Form 2441 (Child and Dependent Care Expenses), maintaining payroll records, copies of canceled checks, or bank transfer confirmations can substantiate expenses if questioned by the IRS. Employers that offer FSA debit cards may still request supporting documentation for certain transactions.

Reimbursement Timing

Once a claim is submitted with the required documentation, processing time depends on the employer’s FSA administrator and payment method. Direct deposit is typically faster than paper checks. Most claims are processed within a few business days, though delays can occur if documentation is incomplete or requires verification.

Since Dependent Care FSAs operate on a pay-as-you-go basis, reimbursements are limited to the amount currently available in the account. If a claim exceeds the balance, the outstanding portion is reimbursed as new payroll contributions are added. To avoid cash flow disruptions, some families coordinate reimbursement timing with their daycare payment schedule.

Spending Deadlines

Unused Dependent Care FSA funds are forfeited at the end of the plan year unless the employer offers a grace or run-out period. A grace period of up to 2.5 months allows participants to incur and submit expenses beyond the calendar year, but this varies by plan.

Some employers offer a run-out period instead, extending the deadline for submitting claims on expenses incurred during the previous year. Unlike Health FSAs, Dependent Care FSAs do not allow carryovers, meaning any remaining balance after the final deadline is forfeited. Reviewing plan-specific deadlines and tracking expenses throughout the year ensures funds are used efficiently.