Dependent Care Benefits (W-2)

What are dependent care benefits (W-2)?

Dependent care benefits refer to specific benefits that are provided by employers to their employees in the care of their dependents. Dependent care benefits are under a bigger umbrella of employee benefits system administered by the Internal Revenue Service (IRS). A list of dependent care benefits can be found in the W-2 Form, box 10. 

Young children are the most common dependents that individuals claim. However, dependent care benefits can apply to the care of other people like an elderly parent or a disabled family member for as long as they meet certain guidelines and stipulations of the IRS. 

How do dependent care benefits help employees? 

Expenses that taxpayers incur in the care of their eligible dependents while they are at work or are looking for work can be heavy on the pocket. Spending money on child care, elderly care, daycare, preschool, and even transportation to and from these care centers can be expensive. 

According to the Internal Revenue Service (IRS), dependents are considered an exemption credit, which means that they can be claimed on the employee’s annual tax return. This is helpful because the applicable credit can significantly reduce an employee’s taxable income by hundreds or even thousands of dollars. 

What are forms of dependent care benefits?

Dependent care benefits include flexible spending accounts (FSA) for dependent care, paid leave for the care of dependents, or tax credits. 

What is a dependent care Flexible Spending Account (FSA)?

A dependent care Flexible Spending Account (FSA) is a type of dependent care benefit that is offered or set up through an employer. A dependent care FSA is an account where funds are used to pay for various types of eligible care services for young children or elderly care. 

How does a Dependent Care Flexible Spending Account (FSA) work?

In a flexible spending account, participants agree and authorize a specific amount of money to be withheld from each pay period’s paycheck. The money withheld shall then go to the flexible spending account or FSA. The amount withheld can be up to $5,000 per year in total for single parents and married couples who are filing jointly. If the employee is married and filing separately, it is $2,500, which includes both employee and employer contributions. 

Now, take note that the funds in the FSA do not pay for the dependent care expenses directly. What happens is that the employee pays for the dependent care-related services first out-of-pocket. These expenses are considered pre-tax which means that it reduces the employee’s taxable income. 

The employee then applies for reimbursement of these expenses to their employer and they are paid using the money from the flexible spending account. When filing for reimbursement, the employee must attach corresponding proof of payment and receipts to the claim form. These attachments must include the following information: the name of the individual who received the service, name of the provider, type of service, and cost. 

An important detail to remember about dependent care flexible spending account is that the employee has to use the funds within a specific period. Otherwise, the employee will lose the contribution and they cannot be returned through cash. 

What are the kinds of expenses that can qualify for dependent care benefits reimbursement? 

Eligible dependent care services are those services rendered to dependents while the employee (and spouse, if married) was either at work or looking for work. This means that the services are necessary so that the employee (and spouse, if married) can work and earn.

For example, let’s say Michael and Anna are married. They have a toddler, Luke, who is 2 years old. Anna and Michael, both work and have employers who have set up a dependent care FSA. Luke attends a daycare center while both Michael and Anna are at work. This expense is qualified to be reimbursed under the FSA. 

However, if Anna decides to stay at home full-time but still has Luke attend the daycare center, this expense is no longer qualified for dependent care benefit reimbursement. This is because, technically, it is not an absolute necessity since Anna can take care of Luke at home. 

The following are deemed qualified expenses for reimbursement:

• In-home care: nanny, babysitter, au-pair (to care for the dependent while parents are at work and not housekeeping or child support payments)
• Child care
• Sick child care
• Daycare services
• Summer day camps (not music or sports lessons)
• Before and after-school care
• Disabled dependent care
• Transportation to and from eligible dependent care
• Registration fees for dependent care

Those who qualify as dependents are children who are children below 13 years old, or a spouse, parent, or adult who live with the employee and are physically or mentally challenged and unable to care for themselves.

What are the kinds of expenses that do not qualify for dependent care benefits reimbursement? 

As mentioned above, please note that eligible dependent care services are those that are necessary so that the employee (and spouse, if married) can work and earn. Here are examples of expenses that do not qualify for reimbursement:

• Education (like tutoring, kindergarten, school tuition)
• Supplemental or enrichment programs and lessons (like piano, guitar, sports, etc.)
• Meals
• Housekeeping tasks

I am an employer. Can I give contributions to the dependent care FSAs of my employees? 

Employers are not required to make contributions to the FSAs of their employees. But employer contributions are allowed. Keep in mind that the maximum combined employer and employee contributions per year are $5,000 for married employees and $2,500 if filings are made separately. 

Common reasons that employers give contributions to FSAs are to help reduce the employee’s time away from work to care for their dependents, support employees to be more productive, and improve employee retention.

How can HR help in managing the use of a dependent care FSA?

While the responsibility of FSA management does not solely rest on the HR team, they can help in reminding employees to use their FSAs, properly claim reimbursements, and manage any employee concerns.