What a dependent care FSA does

A dependent care flexible spending account (FSA) is a workplace benefit that lets you set aside pre-tax money to pay for childcare, adult daycare, or after-school programs. You decide how much to contribute each year, your employer deducts it from your paychecks before taxes are calculated, and you use the money to reimburse yourself for care expenses you actually pay out of pocket.

The main advantage is tax savings: money in a dependent care FSA is not subject to federal income tax, Social Security tax, or Medicare tax. If you spend $5,000 a year on childcare and contribute that amount to a dependent care FSA, you avoid paying taxes on those $5,000 — which can save you $1,000 to $1,500 depending on your tax bracket.

Unlike a health savings account (HSA), a dependent care FSA is not a savings account you own. It is an employer-run benefit, and the rules are stricter about what you can spend the money on and what happens if you do not use it.

Key Takeaways

  • A dependent care FSA lets you contribute pre-tax money through your employer to pay for childcare, preschool, adult daycare, or after-school care for children under age 13.
  • You choose your contribution amount during open enrollment, and your employer deducts it from your paychecks before income and payroll taxes are calculated.
  • You must submit receipts or invoices to your employer or FSA administrator to get reimbursed, and reimbursement typically takes one to two weeks.
  • Money left unspent at the end of the plan year is forfeited — you cannot carry it over to the next year, with rare exceptions for a grace period or rollover option.
  • Your dependent care FSA is only available if your employer offers it, and you must re-enroll each year during open enrollment.

What expenses a dependent care FSA covers

A dependent care FSA pays for care services while you and your spouse (if married) are working or looking for work. The most common expenses are daycare centers, in-home childcare providers, nannies, preschool, and after-school programs for children under age 13.

The IRS also allows dependent care FSA money for adult daycare — care for a spouse or parent who is physically or mentally unable to care for themselves and lives with you. This includes adult day programs and some assisted living facilities, but not overnight care in a nursing home.

Expenses that do not may have access to include babysitting for date nights or entertainment, overnight summer camps, school tuition (even if the school provides before- or after-school care), transportation to and from care, or care for children age 13 and older. If a daycare center charges a single fee that bundles care with education, only the care portion counts.

How to enroll and contribute

You enroll in a dependent care FSA during your employer's open enrollment period, which usually happens once a year in the fall or winter. You choose how much to contribute for the coming year — the IRS limit is $5,000 per household per year (or $2,500 if you are married and file taxes separately). Your employer deducts that amount from your paychecks in equal installments throughout the year.

You can only change your contribution amount if you have a may have access to life event: birth or adoption of a child, change in your spouse's employment or benefits, significant change in childcare costs, or change in your dependent care provider. A new job or loss of a job also qualifies. Without a may have access to event, you are locked into your contribution amount for the entire plan year.

If you do not have a dependent care FSA through your employer, you cannot open one on your own. The account must be offered by your workplace, and only employees of that employer can participate.

How to get reimbursed

To use the money in your dependent care FSA, you pay the childcare provider out of pocket, then submit a reimbursement request to your FSA administrator (usually a third-party company your employer contracts with). You will need an invoice or receipt showing the provider's name, the dates of care, the amount charged, and proof that you paid it.

Most FSA administrators accept reimbursement requests through an online portal, mobile app, or paper form. You upload or mail your receipts, and the administrator processes the request within one to two weeks. The money is deposited into your bank account or issued as a debit card, depending on how your plan is set up.

Some employers offer a dependent care FSA debit card that you can use directly at participating providers, so you do not have to pay out of pocket and wait for reimbursement. If your plan offers this, ask your FSA administrator which providers accept the card.

The use-it-or-lose-it rule

Money left in your dependent care FSA at the end of the plan year is forfeited — you cannot carry it over to the next year. This is called the use-it-or-lose-it rule, and it is a major difference from a health savings account, which lets you keep unused money indefinitely.

Some employers offer a grace period (usually two and a half months into the next year) during which you can spend down your remaining balance. A smaller number offer a carryover option that lets you roll up to $550 of unused money into the next year. Ask your employer or FSA administrator whether either option is available in your plan.

Because of this rule, you should estimate your childcare costs carefully before you enroll. If you overestimate and cannot spend the money, it is gone. If you underestimate, you will pay for the shortfall out of pocket with after-tax dollars.

Dependent care FSA versus other payment options

If your employer offers a dependent care FSA, it is usually the most tax-efficient way to pay for childcare. However, you should also know about the dependent care tax credit, which is a separate benefit you claim on your tax return.

The dependent care tax credit lets you claim 20 to 35 percent of your childcare expenses (up to $3,000 per year) as a credit on your federal income tax return. You cannot use both the FSA and the credit on the same expenses — you have to choose one or the other. In most cases, the FSA saves you more money because the tax savings are larger, but if your income is very low or your childcare costs are very high, the credit might be better. A tax professional can help you compare.

Some states also offer dependent care subsidies or tax credits. Check your state's revenue or human services department to see what is available where you live.

What happens if you leave your job

If you leave your employer, you lose access to your dependent care FSA. Any money you have not yet reimbursed is forfeited — you cannot take it with you or transfer it to a new employer's plan.

You do have the right to continue coverage under COBRA (the Consolidated Omnibus Budget Reconciliation Act) if your employer has 20 or more employees. COBRA lets you keep your FSA for a limited time (usually up to 18 months) by paying the full premium yourself, including the employer's share. However, COBRA is expensive and rarely worth it for an FSA, since you lose the tax advantage once you are no longer an employee.

If your new employer offers a dependent care FSA, you can enroll during their open enrollment period or if you have a may have access to life event. There is no waiting period or penalty for switching plans.

Frequently Asked Questions

Can I use dependent care FSA money for my child's school tuition?

Only if the school charges separately for before- or after-school care. The tuition itself does not count, but if the school runs a daycare program and charges a separate fee for that service, you can use FSA money for the care portion. Ask the school for an itemized bill that breaks out the care charges from the education charges.

What if I have a baby mid-year and my childcare costs go up?

The birth of a child is a may have access to life event, so you can increase your FSA contribution for the rest of the year. Contact your employer's benefits department or FSA administrator within 30 days of the birth to request the change. You will need to provide a birth certificate or hospital paperwork as proof.

Can I use dependent care FSA money for a nanny?

Yes, as long as the nanny provides childcare in your home while you are working. You will need an invoice or receipt from the nanny showing the dates and amount paid. If you hire a nanny, you are also responsible for withholding and paying payroll taxes on their wages — the FSA does not cover those taxes.

What if I do not spend all my FSA money by the end of the year?

Any unused balance is forfeited unless your employer offers a grace period or carryover option. A grace period (usually two and a half months into the next year) lets you spend down the balance. A carryover option lets you roll up to $550 into the next year. Ask your employer which option applies to your plan before you enroll.

Can I open a dependent care FSA if my employer does not offer one?

No. A dependent care FSA must be offered by your employer as a workplace benefit. You cannot open one independently. If your employer does not offer one, you can still claim the dependent care tax credit on your tax return, which provides a smaller tax benefit.