On 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?