Flexible Spending Accounts? All things considered, the answer is — YES!
A dependent care flexible spending account (FSA) is a great way to pay dependent care expenses and lower taxable income. Here’s how it works:
- An employer sets aside part of an employee’s before-tax pay into a special dependent care account to help pay work-related dependent care costs
- Employees draw from the account, throughout the year, to help pay for eligible expenses
- Dependent care expenses are eligible for reimbursement if the expense allows an employee and spouse — if married, to work, look for a job or to attend school full time.
Because the funds are set aside before taxes are taken, the amount of income subject to taxes, is reduced. For someone in the 28% federal tax bracket, using a dependent care FSA means an income reduction of approximately $280 in federal taxes for every $1,000 spent on dependent care. Actual savings will depend on several factors, including income, tax bracket or amount of income taxes paid and yearly dependent care expenses.
An employer determines the amount that can be contributed to the account, although the Internal Revenue Service (IRS) has set some limits:
- $5,000 per year, if married and filing a joint return, or are a single parent
- $2,500 per year, if married and filing separately
It is important to remember that flexible spending account dollars are “use-it-or-lose-it” funds. Your employees cannot carry balances over from year to year. If there are any unused funds at the end of the plan year, or at the end of any applicable grace period, those funds will be forfeited.
- An employee tax dependent who is under age 13
- Any other tax dependent, such as an elderly parent, who is physically or mentally incapable of self-care and has the same principle residence as the employee
- A spouse who is physically or mentally incapable of self-care and has the same principle residence
And finally, an employee can only be reimbursed for dependent care that has already taken place and for only the amount already contributed to a dependent care FSA.
HR Expertise On Demand
If you’re a small or emerging business and exploring ways to offer flexible spending plans to your employees we’re here to help. Schedule an appointment today at Mercer PeoplePro — we’re standing by and ready to assist.