Autumn has arrived. It’s the time of year when working parents have questions about Dependent Care Spending Accounts (DCSAs). How do they manage their 2020 account to avoid forfeiting funds at year-end? And how should they make open enrollment choices for 2021 when it’s hard to predict their childcare needs during the pandemic?
Employers and benefit advisors want to be ready with answers about this valuable benefit program. Here are some of the most common questions we help them answer:
- What are the basic rules?
The concept is pretty simple. During open enrollment, you elect how much to set aside from your salary for the next year. The amount is taken in equal installments from your paychecks – on a pretax basis – and goes to your DCSA. Then you can use your account to reimburse yourself for eligible dependent care expenses, such as babysitting and daycare center costs. The money taken out of your pay is not taxed and neither are the DCSA reimbursement benefits, so you save money.
In exchange for the tax savings, though, the IRS imposes various rules on DCSAs. A key rule is that expenses must be work-related to qualify for reimbursement. That means you pay expenses for providers to care for your child’s “well-being and protection” so you can work. Children must be under age 13 (or disabled). If you’re married and filing jointly, both parents must be gainfully employed or looking for work (unless disabled or a full-time student).
Another critical rule is that amounts you contribute to the DCSA can only be used to reimburse eligible expenses. At the end of the plan year, any unused amounts are forfeited. This is called the “use or lose” rule. The plan may allow a short grace period after the year ends, so check with your employer for details.
- Are preschool or nursery school fees eligible for reimbursement?
Yes, expenses for preschools, nursery schools, or similar programs qualify for reimbursement.
The expenses must be primarily for the child’s care and not for educational purposes. Preschools, nursery schools, and similar programs below the level of kindergarten are automatically considered non-educational. The facility may provide some educational activities, but the primary purpose should be for the child’s care, similar to baby-sitting. If the facility charges tuition or educational fees in addition to the cost of childcare, the extra charges likely do not qualify for reimbursement.
- My office is closed due to the pandemic so I’m working from home. I still need daycare for my children so I can work. Are the expenses reimbursable?
Yes, provided the daycare services are necessary to enable you (and your spouse, if married) to work, the expenses are reimbursable. Parents may be working on the employer’s premises, or from their homes or other locations, but expenses for work-related childcare are still reimbursable.
- Are expenses for “virtual camps” reimbursable? My spouse and I work from home and we’re paying for online programs to keep our child engaged several hours a day.
No, expenses for virtual or online services are not eligible. To qualify for reimbursement, the care must be for the “well-being and protection” of the child. Virtual camps or online programs do not qualify since they cannot provide for the child’s physical care.
- I have to pay an application fee and deposit before my son starts attending a daycare center. Are those expenses eligible for reimbursement?
Prepaid expenses are eligible for DCSA reimbursement, provided they have to be paid for the child to receive care. After the daycare center begins providing care, the application fee and deposit you paid can be reimbursed from your DCSA. If you cancel and your son does not attend, however, the application fee and deposit will not qualify for reimbursement.
- My 10-year old daughter goes to a private school so they are taking care of her during most of the day while I work. Are my expenses for school tuition and fees reimbursable?
Educational expenses are not reimbursable, unless they are merely incidental as part of a childcare service. Expenses to attend school at the kindergarten or higher level are educational, so the 10-year old child’s school expenses are not eligible. Expenses for before- or after-school care, however, may qualify as reimbursable expenses.
On the other hand, expenses for a child in nursery school, preschool, or a similar program for children below the level of kindergarten are expenses for care. Such expenses are not considered educational even though the nursery school may include some educational activities.
- I stopped contributing to the DCSA this year. Due to the pandemic, my schedule changed and I no longer needed childcare services but my DCSA still has a balance. Can I get my money back?
Contributions made to a DCSA can only be used to reimburse eligible daycare expenses. Although you were able to stop making new contributions due to your schedule change, you cannot get back the money you previously contributed. The balance cannot be “cashed out.” It can only be used for claims.
The pandemic has caused so much disruption with work schedules and childcare arrangements. It is possible that Congress may take action to allow unused 2020 DCSA balances to carry over to next year, but there is no guarantee. As of now, the “use or lose” rule for DCSAs stays the same.
- I’m making open enrollment choices for 2021. I want to contribute to the DCSA but I don’t want to be locked in. Can I stop making contributions during the year if my circumstances change?
The IRS allows making mid-year changes in DCSA elections – including stopping or starting contributions – for a variety of reasons. Note, however, that your employer’s plan may not include all the IRS-allowable provisions so you want to review your DCSA plan materials carefully. Many DCSA plans allow employees to make new elections if they are consistent with specific events, such as:
- The daycare provider changes;
- The number of hours of care changes;
- The cost of the care changes (unless the care provider is a relative);
- The child turns 13;
- The employee or spouse gains or loses employment; or
- The employee has a new child (birth, adoption or placement for adoption).
For detailed information about expenses eligible for DCSA reimbursement, the IRS provides a helpful guide: Publication 503 “Child and Dependent Care Expenses”