DCFSAs for Employers

Last updated
Save as PDF

Most employers struggle with the desire to offer benefits that protect their employees, while needing to manage costs. With a Dependent Care Flexible Spending Account, you give your employees the security of an account that can help them pay for work related dependent care expenses, while reducing their taxable income. And in the end, that helps your company’s bottom line.

Overview

A DCFSA can save money for you and your employees: When an employee contributes to a DCFSA with pre-tax dollars (through automatic payroll deductions that you allow), they reduce their taxable income. Less taxable income for your employees means less payroll taxes for you.

Eligible expenses

Use a DCFSA to be reimbursed for:

Licensed day care facilities
Preschool programs
After-school programs
In-home child and dependent care services
Babysitters if the babysitting is to allow the parent to work
Elder care Dependent care expenses for tax dependents over the age of 13 require proof of medical necessity
Day camp expenses if not educational in nature
Certain application fees

During COVID-19, many people have hired relatives or friends to watch children while the parents are at work. This is an eligible expense for DCFSA reimbursement as long as the friend or relative isn't your spouse, the parent of the child, your dependent, or your child under age 19.

If your family member is your employee and no exceptions apply, then you're generally responsible for withholding and paying income and employment taxes. If your family member isn't your employee, then the family member will generally be responsible for paying income taxes and any applicable self-employment taxes on the income earned.

Examples of expenses not eligible for DCFSA reimbursement:

Private tutors
Lunches and food items
Education programs
Overnight camp
Tuition for kindergarten and higher grades
Activity fees
Summer school
Music and dance lessons
Swimming lessons
Virtual day care and virtual day camps

Dependents over the age of 13

There are times when your employees' tax dependent is over the age of 13 and, because of a medical reason, requires day care so your employees can work. The IRS allows reimbursement from the account for these expenses when the following requirements are met:

The dependent receiving the care is unable to provide the care themselves due to a physical or mental disability. A letter of medical necessity from a qualified medical professional is required to show there is a medical need for the care.
They live in the home more than 8 hours a day
They can be claimed as the member’s tax dependent