Child Care: FSA Eligibility

Child Care: reimbursement is not eligible with a Flexible Savings Account (FSA)
Child care is not eligible for reimbursement with a flexible spending account (FSA), health savings account (HSA), health reimbursement arrangement (HRA) and limited-purpose flexible spending account (LPFSA). However, child care is eligible for reimbursement with a dependent care flexible spending account (DCFSA).

How does dependent care flexible spending account (DCFSA) cover child care expenses?

A dependent care FSA is a unique employee benefit that allows workers to set aside pretax dollars to pay for eligible care expenses for a child, disabled spouse, elderly parent or other individual listed as a dependent who is physically or mentally incapable of self-care. The minimum and maximum amounts allowed to be contributed to a DCFSA are set by the employer, and the maximum set forth by the IRS is $5,000 for individuals or married couples filing jointly, or $2,500 for a married person filing separately. (The American Rescue Plan Act of 2021 (“ARPA”) has increased the dependent care flexible spending arrangement (“DCFSA”) annual limit from $5,000 to $10,500. The increase only applies to the 2021 calendar year and employers are not required to offer the higher limit under their DCFSA plans). As opposed to traditional medical FSAs, expenses can only be reimbursed under a DCFSA that fall within a current account balance, which may make it difficult to cover large claims early in a given fiscal year.

Qualified dependents under a DCFSA include children under the age of 13, dependents of any age who are physically or mentally incapable of self-care, and even adults in some cases if they are provided more than half of that person's maintenance costs in a given year. Most importantly, expenses for the care of these dependents is only eligible if these care services enable the account holders/spouses to work, look for work or go to school full-time. If an employee has a spouse that is a stay-at-home mother or father, he or she cannot participate in dependent care FSAs (Internal Revenue Service).

Expenses that are eligible for dependent care reimbursement include amounts paid for services like babysitters and nursery schools, fees for licensed daycare or adult care facilities and placement fees for dependent care providers, such as a nanny. Additionally, eligible expenses for dependent care reimbursement include summer day camp for kids under 13, before and after school programs, payment to relatives (above age 19 who is not a dependent) who babysit for a qualifying independent or payment to a housekeeper whose duties also include daycare for a dependent. All of these expenses must give the account holders (or spouses) the ability to work, look for work or go to school full-time.