Dependent Care Account (DCA)
Dependent Care Accounts (DCAs) give your employees the ability to pay for work-related dependent care expenses with pretax dollars, allowing them to save on federal income tax, FICA tax and, as applicable, their state income taxes.
How does a Dependent Care Account (DCA) work?
A DCA lets employees use pre-tax dollars to pay for eligible expenses related to care for a child, disabled spouse, elderly parent, or other dependent who is physically or mentally incapable of self-care, so the employee can work, or if married, for a spouse to work, look for work, or attend school full time. The IRS limits annual contributions to $5,000 on income tax returns for single or married filing jointly, and $2,500 for married filing separately.
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Measurable Savings
On average, participants enjoy a 30% (estimated $1500 per year) tax savings on their annual contribution. Employer’s save on their portion of FICA taxes (typically 7.65%).
Why should employees enroll in a DCA?
Child and dependent care is a large expense for many families. Millions of people rely on child care to be able to work, while others are responsible for older parents or disabled family members. Participating in a dependent care account is like receiving a 30% discount from your care provider.
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How does a dependent care FSA work?
A dependent care FSA is a flexible spending account that allows you to set aside pre-tax dollars for dependent care expenses, such as daycare, that allow employees to work or look for work.
Dependent Care Account FAQs
How much can an employee contribute?
The IRS limits annual contributions to $5,000 on income tax returns for single or married filing jointly, and $2,500 for married filing separately.
Who qualifies as a dependent?
You can use your DCA to pay for care for children under age 13 that you claim as dependents, as well as adults or other relatives that are incapable of caring for themselves (if you provide more than 50% of their support).
What type of care is eligible?
Eligible expenses must be for the purpose of allowing you to work or look for work. Services may be provided at a child or adult care center, nursery, preschool, after-school, summer day camp, or a nanny in your home.
What doesn’t qualify?
Certain expenses are not eligible, for instance:
-Expenses incurred in a prior plan year
-Expenses for non-disabled children 13 and older
-Educational expenses including kindergarten or private school tuition fees
-Food, clothing, sports lessons, field trips, and entertainment
-Overnight camp expenses
-Late payment fees for child care
Why should an employee participate?
Since contributions to the account are deducted from your paycheck before income taxes are assessed, your taxable income is reduced. Participants enjoy a 30% average tax savings on the total amount they contribute to the account.
How do I contribute money to my DCA?
Once you make your annual election during open enrollment, your employer will deduct this amount from your paycheck before taxes are assessed in equal amounts throughout the year.
Do I have access to my entire DCA election amount at the beginning of the year?
No, you will only have access to DCA funds that have already been deducted from your paycheck.
Are there any rules about who can care for my dependents?
Yes. You can not use funds to pay for care provided by a spouse, a person you list as a dependent for income tax purposes, or one of your children under the age of 19.