A Parent's Guide to the Dependent Care Flexible Spending Account

Do you pay for child care or other qualifying dependent care so that you (and your spouse, if married) can work or look for work? If so, then a flexible spending account for dependent care could be a great option for your family to use pre-tax dollars to pay for your child care expenses. Many employers will offer a flexible spending account benefit to employees as a way to deduct pre-tax dollars directly from your pay check that can be used for qualifying dependent care costs. The election to participate in a flexible spending account plan is usually provided at the time of enrolling in annual benefits. In this post, I'll break down the basics of a dependent care flexible spending account, eligibility, benefits and other frequently asked questions. 

FAQ #1: What is a dependent care flexible spending account? 

A dependent care flexible spending account (FSA) is a pre-tax benefit account used to pay for eligible dependent care services. 

FAQ #2: Who is eligible to enroll in a dependent care FSA? 

Your employer must offer the plan in order to create a dependent care FSA. If a plan is available, you can enroll in the plan during your company’s next open enrollment window or if you have a qualifying life event (refer to appendix for definition) that occurs outside of the open enrollment window. 

Another key requirement for eligibility is that both parents must simultaneously be working or actively seeking work, a full-time student or incapable of self-care to claim the expenses. Some examples of situations that qualify for use of dependent care FSA funds are as follows: 

1. You and your spouse both work full-time. 

2. You work full-time and your spouse is a full-time student. 

3. You work full-time and your spouse is disabled and unable to provide full-time dependent care.

4. You work full-time and your spouse works part-time on Tuesdays and Thursdays; however, because your spouse only works part-time, you can only claim daycare expenses incurred on Tuesdays and Thursdays. 

5. You work full-time and your spouse is actively interviewing for a new job and using the time while the dependent is in child care to interview and apply for jobs. 

The key here is that expenses incurred for dependent care are only eligible if the parents/caregivers are working, actively seeking employment or are full-time students. What this means is that even if a family decides to send their child to day care a few times a week and one parent is a stay at home parent, the costs incurred during the week for day care are not eligible for reimbursement under the FSA because that other parent is not working during the hours that the dependent is in care. 

FAQ #3: Who qualifies as a dependent? 

1. Dependent children under the age of 13

2. Disabled dependents over the age of 13 that are incapable of providing self-care

3. A disabled spouse 

FAQ #4: What expenses are eligible? 

Common examples of eligible expenses are: 

1. Preschool

2. Summer day camp

3. Before or after school programs

4. Child or adult daycare (for adults that qualify as dependents)

5. Au pair or nanny care

6. In-home dependent care for an adult

A complete listing of eligible expenses can be found on the FSA Fed website that is linked in the appendix. 

FAQ #5: What are the benefits of a dependent care FSA? 

The primary benefit of opening a dependent care FSA is that any amounts contributed to the account are pre-tax. What this means is that money is taken from your gross paycheck and put into the FSA account before any taxes are taken and these amounts are thus excluded from your federal taxable wages for income tax purposes. 

FAQ #6: How are contributions to a dependent care FSA treated for federal income tax purposes? 

Because contributions are deducted from your pay check before taxes are withheld, they must be tracked accordingly for tax reporting as follows: 

1. Amounts deposited into the FSA throughout the year can be used to pay for eligible expenses as they are incurred. 

2. Any employer provided benefits along with your pre-tax dependent care FSA salary reductions are reported on box 10 on your W-2. 

3. Amounts used from the FSA during the year need to be tracked and reported on Form 2441. This is also where you report any amounts that were not used for eligible expenses. Any benefits that exceed your allowable expenses or IRS limits may become taxable.

FAQ #6: What are the contribution limits for 2026? 

$7,500 maximum contributions per household for 2026. This limit applies to both single filers and filers that are married filing jointly. The limit for those that file as married filing separately is $3,750. 

FAQ #7: Are there limitations to keep in mind for contributions during the year imposed by the IRS? 

Yes. Contributions are generally limited by the earned income of the lower-earning spouse (subject to deemed income rules for a full-time student or a spouse that is incapable of self-care). This means that if your spouse only earns $3,000 per year, you are only able to contribute up to $3,000 to the dependent care FSA. 

FAQ #8: What happens if there are unused funds in the FSA at the end of the fiscal year? 

Dependent care FSAs are typically structured as a use it or lose it benefit, meaning you must use all funds in the account during the year for eligible expenses or you risk forfeiting remaining unused balances. However, check your employer’s specific plan to see if any grace period is offered. Some plans do allow employees to submit claims for new eligible expenses that arose after the end of the plan year and use prior year funds to pay for them, but this is at the discretion of the employer specific plan. 

FAQ #9: What if I leave my employer? 

You can only be reimbursed up to the amount that has already been contributed to your account through payroll deductions during the year. Eligible expenses must generally be incurred on or before your employment ends, unless your employer's plan allows post-termination expenses to be reimbursed.

Most plans provide a run-out period after you leave the company, giving you additional time to submit claims for eligible expenses incurred before your employment ended. Be sure to review your employer's plan documents or contact your benefits administrator, as plan rules can vary. 

Any unused balance that cannot be reimbursed under the terms of the plan is generally forfeited.

Appendix

Additional Resources:

1. https://www.fsafeds.gov/explore/dcfsa

2. https://www.irs.gov/faqs/childcare-credit-other-credits/child-and-dependent-care-credit-flexible-benefit-plans

Definitions:

1. Dependent: The IRS defines a dependent as someone who relies on you for financial support. To claim them on your tax return, they must be a U.S. citizen, resident alien, or national, and fall into one of two categories: a Qualifying Child or a Qualifying Relative.

   1. Qualifying Child:

      1. Must be your son, daughter, stepchild, eligible foster child, brother, sister, half-brother/sister, stepbrother/stepsister, or a descendant of any of them.

      2. Must live with you for more than half of the year. 

      3. The child cannot provide more than half of their own financial support for the year.

   2. Qualifying Relative:

      1. Is not a qualifying child.

      2. Their gross income for the year must be below $5,200. Certain income, such as Social Security benefits, is usually excluded from this limit.

      3. They must either be a specific type of relative (such as a parent, niece, nephew, or in-law) or live with you as a member of your household for the entire year.

      4. You must provide more than half of their total financial support for the year.

2. Qualifying Life Event: 

   1. Birth, adoption or death of a child

   2. Change in marital status

   3. Change in employment status - starting or ending employment (or beginning an unpaid leave of absence) by you, your spouse, or your dependent, which impacts care needs or benefit eligibility

   4. Change in daycare provider or cost - a significant change in the cost of care or coverage or switching to a new daycare provider

   5. Dependent eligibility changes