A Dependent Care FSA Can Save You Up To $1,850 Each Year!

Building Wealth, Personal Finance

Updated 6/3/2024

If you know anything about me, you know that I am a literal fanatic (psycho) about personal finance. I love finding continuous ways to optimize my finances in the most optimal solution, and that’s exactly how I came across the Dependent Care FSA.

I listen to personal finance podcasts and read all sorts of FI articles nonstop, partially for the continuous encouragement and motivation and also because I sometimes stumble upon hidden gems that I previously was unaware of. The Dependent Care FSA is one of those hidden gems, and I can’t wait to share it with you!

Key Takeaways

A Dependent Care FSA is a way to avoid taxes on up to $5000/year of eligible expenses
Eligible expenses include popular items like daycare, after-school programs, day camps, preschool, nanny, and even some elder care
67% of employers offer a Dependent Care FSA
The maximum potential savings that a couple could realize is $1,850 on federal taxes alone

As I mentioned, I am always listening to podcasts, reading books and articles, and just seeking any way I can to find unique ways to put my money to work in the most efficient way possible. Honestly, to me, it’s simply a game.

I like to find ways to stretch my dollar as far as humanly possible. This is why I’m such a fan of things like the Roth IRA, HSA, money-saving apps, and meal prepping. However, the method we are discussing today takes the savings to the absolute next level.

In this post, I’m going to answer the following questions:

What is a Dependent Care FSA?
What is Covered and Not Covered Under a Dependent Care FSA?
Who is Eligible for a Dependent Care FSA?
Is it Worth Doing a Dependent Care FSA?
How Does a Dependent Care FSA Work?

What Is a Dependent Care FSA?

Before understanding a Dependent Care FSA, we need to explain what a Flexible Spending Account (FSA) is.

You might be familiar with an FSA from your employer for health insurance. They are a type of account you can contribute money to on a pretax basis for medical bills. One extremely important aspect of the FSA is that the money has to be spent in that calendar year, unlike an HSA. You will often see this option available to someone who uses a low-deductible plan because it provides them a way to save money by using pretax money.

Let me emphasize this point…You either use it or lose it. This isn’t an issue if you have medical bills that you can plan for and put money into your account to get the tax savings, but otherwise, it’s a bit of a risk.

In 2022, the maximum you can contribute to a Dependent Care FSA is $2500 if you’re single and $5000 if you’re married. That might sound like a bit of risk, depending on your scenario, but remember that these are simply the maximum contributions, and you can contribute less than that if you’re worried about spending it all.

It’s never worth contributing more to an FSA than you can spend in a year. You will watch your excess money go down the drain when the year ends.

A Dependent Care FSA has the same mechanics as an FSA used for health, but this is instead used for, well, dependent care. But the question remains – what is dependent care?

What Is Covered and Not Covered Under a Dependent Care FSA?

There are many things that you can use a Dependent Care FSA on, but the piece that most of us are likely familiar with is child care. Below shows a comprehensive list that you can use the Dependent Care FSA for:

table of eligible and not eligible dependent care FSA expenses

Many of these expenses are extremely niche, but this list was taken directly from FSAfeds.com. If there’s one thing that I’ve learned about requesting reimbursement for programs like this, it’s always better to be safe than sorry and know what you’re working with. I can’t imagine putting $5K away to use it for tutoring and then finding out at the end of the year that my savings cannot be reimbursed.

Not only can it not be reimbursed, but you just put $5K into an account that expires and disappears forever!

Let me say this extremely clearly – make sure that your intended reimbursement meets the requirements of a Dependent Care FSA before putting a single penny into the account. The risk isn’t worth the reward!

Who Is Eligible for a Dependent Care FSA?

There are some specific rules to determine eligibility for a Dependent Care FSA, but in my opinion, it starts with your employer. A Dependent Care FSA is an employer-sponsored plan, meaning if your employer doesn’t offer one, you cannot access one. Your next best option is for your spouse to offer it.

So, the first step is to reach out to your HR team and understand if the Dependent Care FSA is an option. If it’s not, ask why not. Chances are there are a lot of people who could take advantage of this and currently aren’t, so it would be worthwhile to yourself and many others to at least ask the question!

The good news is that, according to business.com, 67% of employers offered a Dependent Care FSA as of 2018. I am pleasantly surprised at how high this figure is, considering this is a more niche product that is outside of the normal health insurance and 401k match that you see from many employers.

If your employer does offer the Dependent Care FSA, there are some additional things that you need to qualify for. First, if you’re married, you need to be working or looking for work. There are some stipulations around it such as being laid off vs. stay-at-home parent, full-time students, nanny, etc., so again, I recommend understanding those before opening a Dependent Care FSA.

Second, if covering a child, they must be under the age of 13. This is why a Dependent Care FSA often covers child care.

Third, if covering a spouse or relative, they must be physically or mentally incapable of self-care and live in your home.

At the end of the day, if both you and your spouse are employed, you’re good to go.

Is It Worth Doing a Dependent Care FSA?

If you are someone who is currently paying for daycare, then you’re not asking this question, plain and simple. The cost of daycare and some of the other expenses that are covered under a Dependent Care FSA are just so insanely outrageous that you already know that opening a Dependent Care FSA is worth it.

Just to hammer the point home a bit more, check out some of these statistics from Zippia.com on current childcare availability, costs, and trends:

57% of working families spent more than $10,000 on child care in 2020. In 2021, 59% of families are budgeting to spend more than $10,000 in yearly child care costs.
On average, Americans with children spend at least 10% of their household income on child care.
58% of working parents rely on child care centers — that’s about 6.38 million parents across the nation.
On average, it costs $340 per week to send a child to child care or daycare center.
About 20% of stay-at-home mothers would enter the workforce if they had child care assistance.
The cost of child care has led to a 13% decline in the employment of mothers.
About 42% of mothers are sole or primary breadwinners for their household.
62% of families are more concerned about the cost of child care now compared to before the pandemic.
Roughly 27.1% of infants and toddlers in the U.S. attended some form of paid child care as their primary care arrangement in the U.S.
27% of families who have difficulty accessing child care can not find an open child care slot.

The Difficulty of Daycare

A Dependent Care FSA can make daycare accessible to a family that would otherwise not be able to afford it.

In summary, daycare is extremely expensive. People struggle to pay for it, and even if they can afford it, it’s hard to find a daycare to enroll their children in. Not being able to enroll your children in a certain daycare might lead you to enroll them at a more expensive daycare just to get them enrolled faster.

Truthfully, it’s depressing trying to comprehend some of these childcare statistics. It has become just insane to, first of all, even try to find daycare availability in itself, and then when you do find a daycare with some availability, you’re having to pay a ludicrous amount to send them somewhere that you’re confident your child is going to develop and grow.

toy blocks spelling childcare on a wooden background

My family recently relocated from Ohio to Indiana, and we found that the cheapest daycare we could find would still be $5/week more than where our son was currently going, which was the high-end of the town we were in. When we heard them say that the cost was $200/week, my initial reaction was, “What is wrong with your daycare being this cheap?”

Of course, I didn’t say that, but how messed up is it that this was my initial reaction because every other place I was calling was $300+ per week. Some were even upwards of $2K/month!

WHAT IN THE WORLD!

And, is daycare the place where you want to do your bargain shopping? If the phrase “you get what you pay for” is true, do you want to cut out on your child’s education, safety, healthy meals, and honestly the majority of their living environment? I mean, they’ll potentially be there 8-5 from M-F, maybe earlier and later like our son is. He is literally in daycare more than at home for hours awake. So, no – this is not where we’re bargain shopping, and in turn, we pay a pretty penny for his daycare.

I love the Dependent Care FSA for all of these reasons. You can receive savings regardless of the daycare you choose.

I saved $1,100 on daycare annually using a Dependent Care FSA. Not bad for doing about 10 extra minutes of work! Sure, $1,100 doesn’t now make daycare cheap all of a sudden, but it sure does lessen the blow just a little bit.

How Does a Dependent Care FSA Work?

The process is extremely simple. You will have automatic contributions taken directly from your paycheck and put into a spending account. These contributions might be taken out ratably throughout the entire year, or they can be loaded towards a certain timeframe.

As you incur expenses for daycare or other eligible expenses, you will simply save the receipts and submit them for reimbursement. The process is extremely simple, but you must keep good records of your expenses and receipts just in case you were to ever be audited.

If you have an HSA, you should be doing the same thing for your receipts because you can take reimbursements for medical expenses that you’ve paid out of pocket at any point in the future – no questions asked. You just need to have the receipt.

I just use a Google Sheets file and put pictures of the expense/receipt with some information such as the date, amount, etc., and call it a day.

Again, if you have questions, definitely reach out to HR first because each plan will likely slightly vary since it is indeed an employer-sponsored plan.

Summary

If you have some expenses eligible for the Dependent Care FSA, hopefully, you’re all in and are already asking yourself, “Now, who is my HR person again?” because contacting them should be your first step. Once you’ve done that, you’re ready to start changing nothing in your life except for counting the “savings” you’ll get.

What are you going to do with the savings? Well, I recommend taking a small portion of it and purchasing the Sather Research eLetter to expedite your Financial Independence journey, but that’s just me!