Trusted and Dependent Care Flexible Spending Account (FSA)
Most parents who use Trusted are a part of the dual-income working-parent demographic. Since launching Trusted, we have seen that Trusted is often used when both parents are working — typically after one of the following has happened:
- their child has fallen sick and needs to stay home from school, or,
- their regular nanny has called out because the nanny is sick or has had an emergency, or,
- daycare or school is closed due to a holiday or there has been an isolated epidemic at the daycare or school, or,
- the parents have to work late.
The good news is that the IRS allows families to get tax relief for the cost of caring for children (or other dependents) such that they can work. Some employers offer a dependent care Flexible Spending Account (FSA) and it shares some similarities with the more common healthcare FSA, where families can use their FSA to pay for eligible Trusted expenses.
What Is a Dependent Care FSA (or DCFSA)?
A Dependent Care FSA is a tax-advantage plan approved by the IRS offered by some employers. It allows employees to deposit funds from their paychecks into the plan through the course of the year, which can then be used to pay for eligible child care expenses. The plan is only offered through an employer and cannot be subscribed to otherwise.
The purpose of the plan is to allow working individuals a tax benefit for paying for child care (or other dependent care) that allows the taxpayer to work.
Eligibility Criteria
In order to be eligible to claim the benefits of a DCFSA,
- both spouses must either be working or looking for work (unless incapable of working due to a physical or mental impairment), OR,
- those who are in school full time.
The child must reside in the same house as the taxpayer to be able to be claimed as a dependent. And your child must be under the age of 13 to be an eligible claimant.
You can contribute a maximum amount to your DCFSA of $5,000 per year if you are married and filing jointly with your spouse or if you are single. You are limited to $2,500 annually if you are married and filing separately. Most plan contributions are made directly through payroll deductions.
Benefits
The main benefit of an FSA is that the money set aside in the account is pretax, thus reducing the amount of income subject to taxes. For example, for someone in the 28% federal tax bracket, this income reduction means saving $280 in federal taxes for every $1,000 spent on child care with an FSA. Contributing to this benefit effectively reduces taxable income on your paycheck and spreads the benefit throughout the year. Federal and state taxes, as well as Medicare and Social Security deductions, are calculated on the income net of contributions.
Eligible Expenses
If you pay for Trusted in order to allow you to work, then those expenses are considered eligible under FSA guidelines. Simple!
Payment or Reimbursement
There are two main ways to manage eligible expenses on a DCFSA.
- Some plans will provide you with a debit card — you can simply use your debit card as your form of payment on Trusted. This way, as long as the expenses are eligible, you don’t have to be out of pocket for the expense.
- Some plans still work on the reimbursement model — you will pay for Trusted out of pocket, then fill out paperwork to get a reimbursement check or direct deposit from your benefits administrator. Trusted will provide you with a detailed email receipt that contains all the pertinent details so that you can submit your claim.
“Use it or lose it”
Remember, you must use all of your contributions in the calendar year otherwise, you forfeit them. You cannot carry a balance in your account to the following year.
Setting up a dependent care FSA with your employer can help manage significant expenses when you have to find child care. As always, please consult with your tax preparer and/or your accountant.
If you’d like to learn more or purchase Trusted credits with your DCFSA, please send us an email: support@usetrusted.com
