Dependent Care Flexible Spending Account ; image: grandfather playing board game with granddaughter

Benefits “Open Season” Means It Is Time for Employees to Enroll or to Re-Enroll in a Dependent Care Flexible Spending Account

FEDZONE Ed Zurndorfer

For some federal employees, particularly those employees who have young children or those employees who have adult tax dependents such as parents who need adult daycare, the current benefits “open season” is the time for these employees to enroll or to reenroll in a dependent care flexible spending account (DCFSA). A DCFSA is offered through the Federal Flexible Benefits Plan (“FedFlex” program). Employees (but not retirees) can elect to participate in the Federal Flexible Spending Account program (FSAFEDS). Information about the DCFSA and enrollment information is available here.

A federal employee who enrolls in FSAFEDS contributes to his or her DCFSA via payroll deduction. Contributions are made with before-taxed salary dollars; in particular, before all taxes including federal and state income taxes, and Social Security (FICA) and Medicare Part A (Hospital Insurance tax) payroll taxes.

The DCFSA allows employees to be reimbursed on a before-tax basis for qualified child or adult dependent care expenses. An adult includes a parent, a grandparent, or a disabled adult that an employee can claim as a tax dependent on the employee’s federal income tax return. Among the requirements to claim the adult as a tax dependent is that the employee must provide more than half of the adult’s annual financial support.

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The rules regarding which employees are eligible to contribute to a DCFSA and make tax-free withdrawals to be reimbursed for qualified daycare expenses are identical to the rules for employees who are eligible to take the child and dependent care tax credit (CDCTC). The CDCTC is a nonrefundable tax credit and is utilized on an individual’s federal income tax return, reducing the individual’s federal income tax liability “dollar-for dollar”.

The CDCTC is discussed below. A comparison of the DCFSA and the CDCTC is also presented.

Earned Income Requirement

If a federal employee is married and contributes to a DCFSA, then both the employee and the employee’s spouse must have earned income in order to utilize the DCFSA to pay qualified day care expenses. An exception to the two-earned income requirement for a married federal employee is when the spouse is a full-time student. Earned income includes wage/salary income and net income from self-employment.

Qualifying Individuals for Whom Tax-Free Reimbursements from the DCFSA Can Be Made

The following individuals qualify for the purpose of making tax-free withdrawals from a federal employee’s DCFSA in order to pay qualified dependent care expenses:

  • A child under age 13 who is claimed as a tax dependent of the employee.
  • A disabled spouse unable to care for him or herself, and who lives with the employee more than six months of the year, and
  • Any disabled individual not able to care for himself or herself whom the employee can claim as a tax dependent. The individual must have lived in the same home as the employee during the year.

Qualifying Expenses for Which Tax-Free Withdrawals Can Be Made from the DCFSA

Qualified expenses for the purpose of tax-free withdrawals from the DCFSA include amounts paid for the care of the individual requiring help for household services. Household services include general custodial care of behalf of the individual such as bathing, dressing, cooking, and taking medications.

For the cost of dependent care outside the home, qualifying expenses include money spent for any dependent under age 13. If the case was provided at a dependent care center, the center must meet all applicable state and local regulations. Note the following: (1) A child or an adult day care center is a place that provides care for more than 6 individuals and receives payment for providing such services, even if the dependent care center is not run for profit; (2) Nursery school tuition and fees are qualified daycare expenses but kindergarten tuition does not qualify as daycare; and (3) Regular summer day camp and specialty summer day camps (such as soccer, computers and literature) fees are qualified daycare expenses. Overnight camp expenses do not qualify.

Participation in the FSAFEDS DCFSA

Permanent full-time or part-time federal employees (but federal retirees) may participate in the FSAFEDS DCFSA for calendar year 2024. To do so, an employee must formally elect to participate before the end of the current benefits “open season” which ends on Monday, December 11, 2023. Those employees who have a DCFSA during 2023 must reenroll for 2024 as DCFSA enrollment does carryover from one year to the next.  An employee elects how much he or she wants to have deducted from the employee’s gross salary during calendar year 2024 to be contributed to the employee’s DCFSA. The minimum to contribute is $100 and the maximum to contribute during 2024 is:

  • $2,500 is the employee is married and filing his or her federal income tax return as married filing separate.
  • $5,000 if the employee is married filing his or her federal income tax return as married filing joint, or if the employee is not married, filing as single or head of household.

Note the following: (1) Married federal employees in which both spouses have access to a DCFSA and contribute to a DCFSA are limited to a combined total of $5,000 when contributing to their DCFSAs during 2024; and (2) Any funds contributed to the FSAFEDS DCFSA during 2024 must be used up by the earlier of: December 31,2024 or when the employee retires or leaves federal service. If an employee has not used up the funds set aside to the DCFSA by December 31,2024, then the employee can request to withdraw the funds during the grace period (January 1, through March 15, 2025), assuming the employee continues in federal service during the grace period.

After deciding how much to set aside to the FSAFEDS DCFSA for 2024, the employee should go here and click on “ENROLL IN A PLAN” (shown on the top of the screen). Starting with the first pay date in January 2024, an equal amount is deducted from the employee’s gross salary, spread over 26 pay dates during 2024. The following example illustrates:

Example 1. William is a married federal employee with two small children aged 2 and 4. Both children attend nursery school. William’s spouse, Francine, also works full-time but Francine does not have access to a DCFSA. William therefore elects during the current FSAFEDS “open season” to set aside the maximum $5,000 from his salary during 2024 to his DCFSA. Starting with William’s first pay date in January 2024 and throughout calendar year 2024, a total of $5,000/26, or $192.39 each pay period will be deducted from William’s gross salary and contributed to William’s DCFSA.

Reimbursement for Dependent Care Expenses

As soon as an employee’s DCFSA is funded, the employee can get reimbursed for any qualifying dependent care expenses. The employee can get reimbursed up to the current balance in his or her DCFSA. Unlike the health care flexible spending account (HCFSA) in which an employee can obtain advanced funds from the HCFSA, employees cannot request advanced funds from his or her DCFSA.

To get reimbursed from a DCFSA for qualified dependent care expenses, the DCFSA participant must obtain from the daycare provider his or her Social Security Number, Employer Identification Number, or Tax Identification Number. If a daycare provider is a childcare center providing daycare for more than 6 children, the provider must be licensed by the state or local government.

DCFSA Versus Child and Dependent Care Tax Credit

 Instead of contributing to a DCFSA, a federal employee who is paying daycare expenses for qualifying dependents in order for the employee and spouse (if married) to work, the employee can instead use the paid daycare expenses as a basis for utilize the child and dependent care tax credit (CDCTC). The rules are identical to the rules as to which individuals qualify to utilize a DCFSA and individuals who qualify to utilize the CDCTC.

The CDCTC is a percentage of the dependent care expenses an individual pays for qualifying dependent care expenses. The percentage ranges from 20 percent to 50 percent of qualifying dependent care expenses. The 20 to 50 percent range depends on the individual’s adjusted gross income (AGI). Most federal employees will be limited to 20 percent. When calculating the CDCTC, an employee may use up to $3,000 of qualifying dependent care expenses if the employee has one qualifying dependent and up to $6,000 of qualifying dependent care expenses if the employee has two or more qualifying dependents.

The following example illustrates use of CDCTC:

Example 2. Elizabeth is a federal employee. She is a single mother with a daughter, age 8. Elizabeth also takes care of her mother who lives with her. Each workday, Elizabeth drops her daughter off at elementary school at 7:30 a.m. (for early morning daycare, as school starts at 9:00 am) and drops off her mother at an adult daycare center. Elizabeth picks up her mother after work and then picks up her daughter at 5:00 p.m. (for after school daycare, as school is over at 3:30 pm.

Elizabeth pays the following qualified dependent care expenses: (1) $5,000 for before and after school care expenses for her daughter; and (2) $7,000 for adult daycare expenses for her mother, for a total of $12,000.

Elizabeth is entitled to a $1,200 CDCTC, computed as follows:

20% of qualifying daycare expenses (limit of $6,000), or

20% of $6,000 = $1,200.

Which is More Beneficial – the DCFSA or the CDCTC?

2023 example: DCFSA Versus CDCTC assumptions: Married couple’s annual income is $80,000; married Filing Joint, one child and pays $2,500 of qualifying dependent care expenses.

Information DCFSA CDCTC
Annual Pay $77,500 $80,000
Standard Deduction -27,700 -27,700
Taxable Income 49,800 52,300
Income Tax @ 20% (Federal plus state) -9,960 10,460
FICA + Medicare Part A taxes -5,929 -6,120
Cost of Care -2,500
Net Cost Before Benefit Care $33,911 $33,220
CDCTC tax credit @ 20% 0 500
Net Cash After Benefit   $33,911 $33,700
The difference will depend on a number of variables including tax filing status, income levels, amount of qualifying dependent care expenses, etc. As a general rule of thumb, if an employee is within the 20 percent CDCTC credit range, the DCFSA is better than the CDCTC (more net cash).

Edward A. Zurndorfer is a CERTIFIED FINANCIAL PLANNER™ professional, Chartered Life Underwriter, Chartered Financial Consultant, Chartered Federal Employee Benefits Consultant, Certified Employees Benefits Specialist and IRS Enrolled Agent in Silver Spring, MD. Tax planning, Federal employee benefits, retirement and insurance consulting services offered through EZ Accounting and Financial Services, and EZ Federal Benefits Seminars, located at 833 Bromley Street - Suite A, Silver Spring, MD 20902-3019 and telephone number 301-681-1652. Raymond James is not affiliated with and does not endorse the opinions or services of Edward A. Zurndorfer or EZ Accounting and Financial Services. The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete. While we are familiar with the tax provisions of the issues presented herein, as Financial Advisors of RJFS, we are not qualified to render advice on tax or legal matters. You should discuss tax or legal matters with the appropriate professional.

Dependent Care Flexible Spending Account ; image: grandfather playing board game with granddaughter

Dependent Care Flexible Spending Accounts