Federal employees who need child or dependent care for a qualifying relative can benefit through participation in the dependent care flexible spending account (DCFSA). The DCFSA is one of two flexible pending accounts offered to federal employees through the “FedFlex” program. Information including eligibility requirements for the DCFSA can be found at: https://www.fsafeds.com.
This column discusses the DCFSA and how employees can benefit by using the DCFSA to pay for daycare expenses for qualifying relatives in order for the employees (and, if married, their spouses) to work.
The DCFSA allows employees to be reimbursed on a before-tax basis for qualified child and adult daycare expenses. An adult includes a parent, a grandparent, or a disabled adult for whom an employee can claim as a tax dependent. The employee must provide more than half of the adult’s support during the year.
The rules regarding an employee’s participation in a DCFSA are identical to the rules for an employee to take the child and dependent care tax credit (CDCTC) when the employee files his or her federal income tax return.
Earned Income Requirement
A single federal employee must have earned income -salary or self-employment income – in order to utilize the DCFSA. With a married couple in which one spouse is a federal employee, both spouses have earned income in order for the federal employee to utilize the DCFSA. The exception for a married couple is when one spouse is a full-time student.
Qualifying Individuals for Which Tax-Free Withdrawals from the DCFSA Can be Made
The following individuals are qualifying individuals for which tax-free withdrawals can be made from a DCFSA to help dependent care expenses:
• A child under age 13 who may be claimed as a tax dependent of the DCFSA owner.
• A disabled spouse of the DCFSA owner who is unable to care for himself or herself, and who lives with the DCFSA owner for more than six months of the year.
• Any disabled individual unable to care for him or herself for whom the DCFSA owner can claim as a tax dependent and lives in the same home as the DCFSA owner through the year.
Qualifying Expenses for Which Tax-Free Withdrawals Can Be Made from the DCFSA
Qualifying expenses include amounts paid for household expenses and care of the qualifying individuals while the federal employee (and spouse if married) are working. Household services are ordinary and usual services performed in the employee’s home that are necessary to manage the employee’s home. They include the services of a housekeeper.
Also included is the cost of care provided outside the home for any child dependent under age 13, or any qualifying adult who regularly spends at least eight hours a day in the employee’s home.
If the care was provided in a dependent care center, then the center must meet all applicable state and local regulations. Note the following: (1) A dependent care center is a place which provides care for more than six individuals and receives a fee, payment, or grant for providing these services, even if the center is not run for profit; (2) Nursery school (but not kindergarten) qualifies as day care; and (3) Specialty day camps, such as soccer, computers, literacy and drama, are qualified expense, but not overnight camps.
How to Participate in the FSAFEDS DCFSA
Only permanent (full-time or part-time) may participate in the DCFSA offered through FSAFEDS. Federal retirees are not allowed to participate in the DCFSA.
Enrollment or renewing enrollment in the DCFSA program for 2025 is done during the current “open season” which is being held November 11,2024 through December 9, 2024. DCFSA enrollment must be renewed from one year to the next. The following are the specific steps for employees to take in order to enroll in the DCFSA for 2025:
Step 1. Determine the annual contribution amount to the DCFSA. An employee must decide how much he or she wants to contribute to the DCFSA during 2025. The minimum contribution amount is $100, and the maximum contribution amount is: (1) $2,500 if the employee is single or married and files his or her federal income tax return as married filing separate; and (2) $5,000 if the employee is married and files his or her federal income tax return as married filing joint.
Note: (1) If a federal employee is married and both the employee and spouse are both eligible to contribute to a DCFSA through their respective employers, then the federal employee and spouse cannot both contribute $5,000 to their respective DCFSAs. Their combined contributions to their DCFSAs cannot exceed $5,000; (2) The amount that an employee designates to contribute to a DCFSA for 2025 must be used up within calendar year 2025 and the grace period January 1 through March 15, 2026. Any funds left in the DCFSA at the end of the grace period will be forfeited. If an employee plans to leave federal service or retire from federal service before December 31, 2025, then any balance in his or her DCFSA must be used no later than the employee’s departure or retirement date.
Step 2. Enroll in the DCFSA. After deciding how much to contribute to his or her DCFSA for 2025, an employee needs to enroll by going to https://www.fsafeds.com and clicking on: “Enroll In A Plan”. Once the employee enrolls, then starting with the employee’s first paydate in January 2025, funds will be withdrawn from the employee’s gross salary (that is, before all taxes, including federal and state income taxes, and Social Security and Medicare Part A payroll taxes are deducted). An equal amount is withdrawn from the employee’s gross salary on an equal basis, spread over 26 pay dates. The following example illustrates:
Jerry is a federal employee, married and has two small children, ages two and four. Both children attend nursery school. Jerry’s wife, Sandra, also works but does not have access to a DCFSA. During the current open season. Jerry elects to set aside $5,000 from his salary during 2025 to his DCFSA. Starting with Jerry’s first pay date in January 2025, a total of $5,000/26 or $192.31 will be subtracted from Jerry’s gross salary.
Step 3. Contribute and get reimbursed for qualifying dependent care expenses.
As soon as an employee’s DCFSA is funded, the employee can get reimbursed for qualifying dependent care expenses up to the DCFSA account balance. Unlike the health care flexible spending account (HCFSA), an employee can get reimbursed for incurred dependent care expenses only up to the current balance in the DCFSA. Eligible dependent care expenses for which reimbursement can be made are found at: https://www.fsafeds.gov/explore/dcfsa/expenses.
In order to be reimbursed for qualified dependent care expenses, a DCFSA owner must obtain from the daycare provider his or her Social Security Number or Tax Identification Number (TIN). If a daycare provider is a childcare center providing care for more than six children, then the daycare 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 could instead use the daycare expenses as a basis for the child and dependent care tax credit (CDCTC). The rules as to who qualifies to take the CDCTC are identical as the rules for qualifying to contribute to and use a DCFSA.
An employee cannot use the same qualifying expenses for reimbursement from the DCFSA and as a basis for taking the CDCTC. The question then becomes which benefit is more advantageous in the sense of lowering a federal employee’s federal and state annual tax liabilities? To answer this question, there are several variables (the most important of which is an employee’s federal and state income tax marginal tax brackets).
Federal employees who want to know which benefit – the DCFSA or the CDCTC – will result in the largest reduction in 2025 federal and state income tax liabilities are advised to consult with a qualified tax professional.