Dependent Care Flexible Spending Account
A Dependent Care Flexible Spending Account (DC-FSA) covers qualified daycare expenses for children younger than age 13 and adult dependents who are incapable of caring for themselves. An example of an adult dependent would be an elderly parent not capable of self-care who has the same principle residence as the employee. Qualified expenses are those expenses required for the purpose of allowing the employee and, if married, their spouse, to be employed. A DC-FSA provides tax savings because employees don’t pay federal or FICA taxes on the money they put into their account, and many state taxes are also exempt. With a DC-FSA, pre-tax funds are deducted from each paycheck and automatically deposited into the employee’s account.
When an employer augments a benefits package with a DC-FSA, it sends a strong message to employees that their employer cares about their work-life balance, and it helps employers attract and retain staff.
Plan Design Options for a DC-FSA
There are no health plan deductible or out-of-pocket requirements for a DC-FSA, which can be offered without any health plan. Employees select the amount of their contribution up to the IRS limit. In 2017, the maximum election allowed is $2,500 for someone who is married, but filing taxes separately, and $5,000 for someone who is married and filing jointly or who is a single parent.
How it Works
With a DC-FSA, employees save money by reducing their taxable income and budgeting for daycare costs. The first step for an employee is to estimate their annual FSA contributions carefully and make their election in open enrollment. Regular, pre-tax contributions to the FSA are deducted from their paychecks.
Unlike the HC-FSA, the total election amount of the DC-FSA is not available January 1st. Employees can only be reimbursed for expenses equal to the amount of money they have already contributed to their DC-FSA via payroll deduction. When an employee incurs qualified daycare expenses, they can submit claims to be reimbursed from the DC-FSA. All claims have to be substantiated or verified as an eligible expense. Submitting claims can be done online, on our mobile app, or by mail. Having a debit card with the DC-FSA provides easy access to DC-FSA dollars at daycare providers that accept debit card payments.
Why We Ask for Substantiation
The Internal Revenue Service (IRS) requires plan administrators to validate that a DC-FSA is used only for eligible daycare expenses. When an employee submits a claim for reimbursement to their DC-FSA, they’ll need a detailed receipt from their daycare provider, including:
The date of service or purchase;
The name of the daycare provider;
The service provided; and
The amount the employee paid or is responsible for paying.
If a receipt doesn’t include all of the necessary information, we have to deny the claim. We’ll notify the employee by letter (or by email, if they choose), and tell them how to resubmit the claim with the proper documentation.
Debit Cards and Receipts
Most of the time, when employees use their debit card, the purchase is automatically substantiated. This means that the provider’s merchant system sends us the information we need to verify the card was used for an eligible expense. There are times, though, when we can’t verify that the card was used for an eligible expense. When that happens, we’ll send the employee a notice asking for a receipt or other documentation and instructions on how to send it back to us.
As a service to employers, HSA Bank offers the faciliation of Plan Documentation as well as Non-Discrimination Testing for Dependent Care Flexible Spending Accounts.
HSA Bank can facilitate the generation and maintenance of the written Plan Document and Summary Plan Description for DC-FSA plans. These documents are a crucial part of any benefit program offered by employer groups as they communicate the plan benefits and how each plan operates. All documents are stored electronically for later reference and include a date and time stamp of the original or any subsequent revisions.
HSA Bank can facilitate the Non-Discrimination Testing (NDT) for DC-FSA plans. The IRS requires employers to perform NDT each year. The reason for NDT is to prevent key and highly compensated employees from receiving a disproportionate amount of employer provided tax-free benefits as compared to the rank-and-file employees. NDT is an important component of plan compliance. Failure of an employer to satisfy the nondiscrimination testing requirements or take the necessary corrective measures can result in the inclusion of the discriminatory benefits in the income of highly compensated employees.