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HR Party of One is brought to you by BerniePortal.
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Dependent Care Flexible Spending Accounts—or DCFSAs —are valuable tax-advantaged accounts
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that allow working parents and caregivers to save on necessary dependent care expenses.
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These accounts play an increasingly important role in today’s workplace, where the cost of daycare,
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after-school programs, and elder care continue to rise. By offering Dependent
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Care FSAs, organizations can support employees in managing these expenses,
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which can positively impact employee morale, productivity, and retention.
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As an HR professional, you’re the bridge between these valuable benefits and the
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employees who need them most. Understanding the ins and outs of Dependent Care FSAs will allow
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you to communicate their value effectively, helping employees make informed choices while
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ensuring your organization complies with IRS requirements and other regulations.
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Today, we’ll cover: How Dependent Care FSAs Work.
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Common DCFSA-eligible expenses. Important Compliance Considerations.
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HR’s role in administering DCFSA accounts, and more!
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Let’s get started!
How Do Dependent Care FSAs Work?
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How Do Dependent Care FSAs Work? Dependent Care FSAs let employees
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set aside pre-tax dollars to cover eligible dependent care expenses. These contributions
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reduce an employee’s taxable income, often leading to substantial tax savings,
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particularly for those with high annual care expenses.
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Each year during open enrollment, employees select a contribution amount, keeping in mind
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IRS limits. For the:
2025
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or $2,500 if married and filing separately. It’s worth noting that Dependent Care FSA
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contributions typically become available on a rolling basis,
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meaning employees can only access funds that have already been deducted from their paycheck.
Who Is Eligible for a DCFSA?
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Who Is Eligible for a DCFSA?
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Employees must meet certain eligibility criteria to qualify for reimbursement and enjoy the tax
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benefits of a Dependent Care FSA. Specifically, the dependent receiving care must be a “qualifying
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individual,” which includes: A dependent child under age 13.
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A dependent who is physically or mentally unable to care for themselves and lives with the employee
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for at least half of the year. Or ... A spouse who is physically or mentally
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incapable of self-care and also resides with the employee for at least six months of the year.
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It’s important to note that the IRS has even more specific guidelines regarding
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who qualifies as a dependent. Employees with questions about eligibility or care
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for a specific individual are encouraged to speak with a tax advisor for guidance.
Common Eligible Expenses
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Common Eligible Expenses.
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When employees ask what Dependent FSAs cover,
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here are several eligible expenses you can share with them:
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Daycare or preschool costs for children under 13. Before and after-school care programs.
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Summer day camps. In-home or out-of-home
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care for dependents who cannot care for themselves due to age or disability.
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In your role, you can provide valuable clarity by explaining what’s not eligible. For instance,
Ineligible Expenses
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Dependent FSAs don’t cover school tuition, food, or overnight camps,
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which some employees might assume would qualify.
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Another tip is to emphasize that expenses must be directly related to the care of a dependent
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to allow the employee to work or look for work. This IRS guideline helps employees understand
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that recreational or educational expenses not tied to caregiving aren’t typically eligible.
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Keep in mind that employees can have both a Dependent Care FSA and a regular Health FSA
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at the same time. Each account serves different purposes and has its own contribution limits and
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eligible expenses, so funds from one cannot be used for expenses covered by the other.
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Important Compliance Considerations.
Important Compliance Considerations
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While Dependent FSAs are advantageous, they come with specific compliance obligations. The
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“use-it-or-lose-it” rule, for instance, requires that all funds are used within the plan year,
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meaning any unspent balance is forfeited. Encouraging employees to think carefully
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about their annual care costs during enrollment can prevent over-contributing,
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which is especially important for families with fluctuating childcare needs.
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Another key compliance element is nondiscrimination testing,
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which ensures the benefit is fairly distributed and does not disproportionately
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favor highly compensated employees. If an organization fails these tests,
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it could lose tax benefits for all participants, undermining the FSA's purpose.
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Additionally, HR should remind employees that they must retain receipts for all
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expenses. This documentation is critical for substantiating claims if they’re audited or if
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the company requires proof of qualified expenses. For more guidance identifying compliance risks,
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use this HR Scorecard. I’ll link it in the description.
Can You Change Your DCFSA Mid-Year?
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Can You Change Your DCFSA Mid-Year?
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After an employee sets their DCFSA contributions for the plan year,
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these selections typically remain fixed until the next open enrollment. However,
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the IRS does recognize that significant life events don’t always align with enrollment
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timelines. If the benefit plan allows, employees may adjust their Dependent
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Care FSA contributions mid-year following specific IRS-approved life events, including:
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Changes in marital status (such as marriage, divorce, or the death of a spouse).
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Adjustments in the number of dependents (due to birth, adoption, or the loss of a dependent).
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Employment status changes for the employee, their spouse, or a dependent.
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Eligibility requirement shifts (such as a dependent becoming eligible or no
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longer qualifying for the FSA). Relocation for the employee,
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their spouse, or a dependent. Or... Alterations in the cost of dependent care.
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These events may permit an employee to update their FSA contributions mid-year,
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though specific guidelines depend on the employer’s benefit plan.
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HR’s Role in Administering Dependent FSAs.
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Offering Dependent Care FSAs involves ongoing administrative duties. Your role includes:
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Educating employees about the benefit during open enrollment, providing information on eligible
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expenses, and explaining the tax advantages; and Coordinating payroll deductions to ensure that
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contributions are withheld and deposited correctly.
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To help streamline these responsibilities, many organizations partner with a Third-Party
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Administrator (TPA) like BerniePortal’s sister company, Alpine. TPAs simplify
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the administration of FSAs by automating payroll deductions, managing compliance,
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and providing clear guidelines for employees on eligible expenses. With Alpine integrated
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into BerniePortal’s all-in-one HRIS, managing dependent care, health FSAs,
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commuter benefits, and more becomes a seamless part of your HR processes.
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A well-communicated Dependent Care FSA can be the difference
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between employees who feel supported in balancing family and career and those
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who face extra stress. Remember—your role is as strategic as you make it!
