Four Proposals to Amend Dependent Care Flexible Spending Accounts

100227-N-0995C-010On Memorial Day weekend, the seasons turn from spring to summer—societally, if not meteorologically. For many families, their child care arrangements change also. School lets out, and after-school programs are no longer in session.

Lucky parents have teenage babysitters or summer-long camps. Other parents cobble together a week at one camp, a week at another, a week with grandparents, etc., hoping that none of these arrangements falls through at the last minute.

But all parents struggle not only with arranging for good summer care, but with the year-round costs of paying for child care.

One solution—although not a panacea—would be increased use of dependent care flexible spending accounts. A dependent care FSA, authorized under Section 125 of the Internal Revenue Code, lets parents use pretax dollars to pay for child care expenses. Many employers permit employees to put away pre-tax money in Section 125 accounts, but these accounts are not as valuable to parents as they could be, for a number of reasons.

Here are four proposals to increase the value of dependent care FSAs to parents:

1.  Increase the $5,000 limit

The maximum amount that parents can set aside in a Section 125 account for dependent care is $5,000. Child care expenses typically are far greater than that amount. The limit has not changed since Section 125 was adopted in 1978, despite the fact that child care costs have risen dramatically in the past thirty-five years.

If this benefit is to remain meaningful, the limit should be increased to $10,000, and perhaps indexed to inflation.

2.  Permit Reimbursement In Advance of Funding

Employees cannot obtain advance reimbursement of child care expenses out of their dependent care FSAs the way they can out of health FSAs for medical expenses. Parents must put the money in the dependent care FSA out of their paychecks before they can claim reimbursement of the pre-tax funds. The rationale is that dependent care expenses are more predictable and regular than medical expenses.

Nevertheless, changing the dependent care FSAs to match the advance reimbursement procedures of health FSAs would provide parents with some additional flexibility in using these accounts.

3.  Reduce or Eliminate Carryover Restrictions

Currently, dependent care FSAs must be used each calendar year, or the funds in the account are lost. This “use it or lose it” aspect of dependent care FSAs limits their attractiveness to many parents. Amending the rules for dependent care Section 125 accounts to permit the carryover of funds from year to year would enable parents to save in advance for child care expenses.

Some legislative proposals have recommended that parents be allowed to carry over up to $500. Even this would be a benefit.

4.  Provide Pre-Tax  Savings Vehicle Outside of Employer Plan

Currently, Section 125 accounts are only available to employees whose employers chose to sponsor such accounts. Perhaps an HSA-like or IRA-like pretax account for parents whose employers don’t provide Section 125 accounts would help. This, combined with the ability to roll over unused funds to a Section 529 educational savings plan might make saving for child care more feasible.

None of these ideas will solve the issue parents have in finding and paying for good quality child care. But these proposals might be steps in the right direction.

What other ideas do you have for expanding use of dependent care flexible spending accounts?






Filed under Benefits, Human Resources, Work/Life

5 responses to “Four Proposals to Amend Dependent Care Flexible Spending Accounts

  1. Since it has been decided that corporations are people too, why don’t we extend the same tax benefits to people that we extend to corporations? If the money is spent as a valid expense, it becomes a deduction. Not only would this even out the treatment between people as people and corporations as people, it would also greatly simplify the process-eliminating set up of separate funding accounts, eradicating use-it-or-lose-it, dispensing with disparities in deduction allowances based on income, etc.

    • Interesting idea, but I’m afraid I can’t agree. How would we agree what constitutes a “valid expense”?
      I’m much more in favor of a flat tax (above a threshold income that would be tax-exempt) and eliminating almost all deductions and credits. I’d get rid of most of the tax breaks for corporations as well and reduce the corporate tax rate.

  2. Charlie

    The contribution limit constraints need to be amended with common sense. We are a single income household. Our single-source income is just slightly higher to what our combined income was when we were both working. Under current rules and two incomes, we were both able to contribute $2500 per year to max the DDFSA contribution at $5000. Now, based on the single-income, we can only contribute $2000. There is a disconnect here that needs to be addressed.

    • Charlie

      And by $2000, I mean TOTAL…compared to the $5000 from a (very) slightly lower combined income.

      • Charlie, this is an interesting idea — one I haven’t heard before.
        Should the FSA amount be per worker or per family? What do other readers think?
        Thanks for the comment.

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