Dependent Care Benefits

Types of Dependent Care Benefits

There are two types mainly: Child Dependent Care tax credit and Dependent Care flexible spending. Let’s look at each of them:

1. Child and Dependent Care Tax Credit

When an employee pays to another entity for taking care of his/her children or another dependent, then the employee becomes eligible for child and dependent care tax credit. Such credit covers the cost of taking care of a child or dependent person with a disability. The primary benefit is that the employee gets a tax credit, instead of a tax deduction - which is more beneficial. To get qualified for such credit, an employee should pay a daycare provider to take care of his/her dependents.

An employee is excluded from such credit if:

• His spouse take care of dependent
• Ex-husband or wife takes care of the child
• Any individual listed as dependent is enrolled under employee taxes
• His/her child takes care of the child or dependent

2. Dependent Care Flexible Spending Account

Using FSA, an employee can get pre-tax benefits. This account is used to credit money to pay for the services that are taken for the dependent care by employees while they are at work. Payroll taxes are exempted from this account. This enables employees to take more income home and pay less taxes.

Important Points

• An employer provides dependent care benefits through a Flexible Spending Account.
• An employee can contribute up to $5K per year (including employer and employee contributions) to FSA from his/her paycheck .
• An employee pays out of pocket expenses for work-related child care, elderly care, and disabled person care via specially issued debit cards. This money is entitled as pre-tax.
• Dependent Care Benefits amounts are categorized as exemption credit under IRS and the same is highlighted in box 10 of an employee’s W-2 form.

Who are Qualifying Dependents under Dependent Care Benefits?

A person is classified as qualified dependent if he/she matches the below criteria:

• An employee’s qualifying child or relative who is aged below 13 at the time of receiving care
• Mentally or physically unfit spouse of an employee who is unable to take care of himself and has lived with the employee for at least six months.
• A family member of the employee who is physically or mentally unfit and has lived with the employee for six months or above. The person should also be someone who is unable to take care of himself and earns an income below $4200.

What are Different Options for Dependent Care Benefits?

Some of the popular options under Dependent Care Benefits are given below:

• Adult Care
• Custodial elder care
• Day nursing care
• Disabled dependent care
• Transportation to/from eligible dependent care
• Child care
• Daycare
• Babysitting
• Nursery school, preschool (it should not be private school, tutoring or summer school)
• Sick child care
• Etc.

How Can Employers Set Up Dependent care FSAs?

For setting up an dependent care FSA, follow the below steps:

• Choose an insurance/benefits broker to build an FSA that suits your business goals.
• The plan covers details of how much contribution will be made by employee and employer (if any), and rules that will apply.
• Communicate dependent Care FSA benefits plans to employees.
• Submit a Signed Administration Agreement to your Benefits Broker.
• Authorize employees to withhold a fixed amount of money from their paycheck so that it can get deposited to a separate FSA account.The amount value cannot be changed until the next open enrollment period or within 31 post the qualified life event (e.g., marriage, birth, divorce, etc.)
• Enroll eligible employee under the plan during open enrollment using Benefits Election Annual Form
• Submit the benefits election form along with employee’s medical details