What is a Dependent Care Flexible Spending Account?

Christine W.
Christine W.
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Man climbing a rope

A dependent care flexible spending account is used to pay for certain expenses related to child and dependent care that are necessary to allow parents or guardians to work or attend school on a full-time basis. A dependent care flexible spending account is a benefit available in the United States that employees can set up through participating employers. It provides a tax-advantaged way to pay for qualified work-related day care expenses.

Dependent care flexible spending accounts are capped by the U.S. Internal Revenue Service at $5,000 US Dollars. The employee estimates the amount expected to be incurred for day care expenses during the plan year and completes the necessary enrollment forms through his or her employer. The amount requested to be set aside into a dependent care account will come out of the employee’s paycheck in equal amounts during the course of the plan year.

As day care expenses are incurred, the employee submits a claim form along with documentation of the expenses. Reimbursements are then made to the employee by check or direct deposit from the flexible spending account. These accounts are a “use it or lose it” benefit. This means that any money left in the dependent care flexible spending account at the end of the plan year is forfeited.

The day care expenses must be for a qualifying individual. This includes a dependent younger than 13 or a spouse or other dependent who is physically or mentally handicapped and unable to care for himself or herself. In addition, the care services must be provided by an eligible provider, such as a licensed day care facility.

The benefit of having a dependent care flexible spending account is that it allows a person to pay for day care expenses using pre-tax dollars. Using a flexible spending account lowers the person's taxable income, because U.S. federal income taxes and Social Security taxes are not paid on this money. In many states, state income taxes also are not paid on money that is set aside in a dependent care flexible spending account.

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