When people think of using a Dependent Care FSA (DCFSAs), expenses that typically come to mind are things like daycare, after-school care, and day camp. It’s easy to forget that these accounts can be used for adult-dependents (e.g., elder care) as well and can cover more costs than just childcare! That’s why we wrote this post. It will focus on using a DCFSA for non-childcare expenses, and adult-dependent qualifications, expenses, and more.
First things first, what is a DCFSA?
A Dependent Care FSA (DCFSA) is a type of flexible spending account that provides tax-free money for:
- the care of a spouse or dependent of any age who is physically or mentally incapable of self-care and is a tax dependent, or
- child care expenses for children under the age of 13 (or 14, depending on your plan).
This type of account must be explicitly used for work-related expenses for the care of, as it related to this post, an adult-dependent. This means that the cost must cover home-care for an older or incapable dependent while participants/caretakers are at work. This is the same requirement as using the account to pay for childcare expenses.
An expense is considered work-related only if both of the following are true:
(1) the expense allows you (and your spouse if filing jointly) to work or look for work,
(2) the expenses are for a qualifying person’s care. (See below for information regarding qualifying
persons as defined by the IRS.)
Some quick examples of potentially eligible non-child care expenses are:
- adult daycare centers,
- elder or senior daycare,
- household employees whose services include care of a qualifying person, and
- transportation to and from eligible care (provided by your care provider; maybe require a letter of necessity).
These accounts aren’t just for kids!
As mentioned above, participants often think of only child-care expenses when it comes to DCFSAs. However, there are many care expenses the funds can be used for that assist adult-dependents with a myriad of needs. See below for examples of eligible DCFSA non-child care expenses.
The IRS specifies that to be a qualifying dependent adult for the purposes of a DCFSA, they must be physically or mentally unable to care for themselves and be a tax dependent. What does this mean?
IRS publication 503 gives a general overview of eligible dependent adults who may qualify as physically or mentally unable to care for themselves:
- Someone who cannot dress, clean, or feed themselves due to physical or mental problems; and/or
- Individuals who must have constant attention to prevent themselves from injuring themselves or others.
Okay, now who is eligible for a DCFSA?
As noted previously, in this post, we’re focusing on the DCFSA qualifications for dependents who are not children. (For more information on qualifications for child-dependents, read our overview of DCFSAs.)
DCFSA expenses must be for the care of one or more dependents (described by the IRS as qualifying persons). According to IRS Publication 503, to be considered a dependent, a person must be your qualifying relative.
The IRS defines a (non-child) qualifying person as:
- Your spouse who was not physically or mentally able to care for themselves and lived with you for more than half a year; or
- A person who was not physically or mentally able to care for themselves, lived with you for more than half the year, and either:
- Was your tax dependent, or
- Would have been your dependent except that:
- They received gross income of $4,300 or more,
- They filed a joint return (per IRS requirements), or
- You (or your spouse, if filing jointly) could be claimed as a dependent on someone else’s prior year tax return.
Note: To claim DCFSA credit, participants-caretakers must have earned income during the year. Earned income includes wages, salaries, tips, other taxable employee compensation, and net earnings from self-employment.
What non-childcare expenses can DCFSAs be used for?
DCFSAs can be used for many adult-dependent related expenses. Expenses are for the care of a qualifying person only if their main purpose is the person’s well-being and protection.
The lists below are just a few examples of expenses that may or may not qualify and are not meant to be exhaustive. Be sure to consult your tax advisor or FSA administrator if you have questions about whether a particular expense is eligible for reimbursement under this program.
Some eligible adult-dependent care expenses may include:
- Adult daycare
- Elder or senior daycare
- Fees and deposits for services of care provider
- Housekeeper whose duties include care of the qualifying person (e.g., maid or cook who helps care for dependent)
- Meals and lodging for a housekeeper who cares for a qualifying person
- Taxes paid on wages for qualifying dependent care services
- Transportation to and from dependent care center (provided by a care provider)
Note: eligible adult-dependents must live with participants-caretakers at least 8 hours per day and be claimed as a dependent on their federal tax return
Some non-eligible adult-dependent care expenses may include:
- Fees or advance payments made to a retirement home or continuing care facility
- Long-term care services
- Long-term care insurance premiums
- Virtual care
See IRS Publication 503 for a detailed description of eligible adult-dependent expenses.
What are DCFSA contribution limits?
The annual contribution limit for DCFSAs is $5,000 (or $2,500 for married individuals filing separately). If both a participant-caretaker and their spouse’s employer offer DCFSAs, the maximum limit is still $2,500 combined.
The American Rescue Plan Act of 2021 (“ARPA”) included a provision to optionally increase the annual contribution limit for this year to $10,500.
(Note: At this time, Gusto currently does not support this optional limit increase.)
How do DCFSAs differ from health FSAs?
A health FSA is a pre-tax account that allows participants to use the funds for eligible health care expenses for participants and their beneficiaries. While DCFSAs are pre-tax accounts for expenses related specifically to the care of an eligible dependent (adult or child). They are not interchangeable.
DCFSAs also differ in contribution limits, rollover and grace periods, and “pre-funded” versus “post-funded” status.
See the chart below for some examples of other differences between the two.
DCFSAs versus health FSAs at a glance
|Detail||Health FSA||Dependent Care FSA|
|Enrollment Eligibility||Employer must offer as a benefit||Employer must offer as a benefit|
|Eligible Expenses||IRS eligible out-of-pocket medical expenses||IRS eligible work-related care expenses for qualifying dependents|
|Max annual contribution (2021)||$2,750||$5,000 ($2,500 for married individuals filing separately) For 2021 in relation to COVID-19, if allowed by administrator: up to $10,500.|
|Who Contributes||Employees and Employers||Employees and Employers|
|Who Owns the Money||Employer||Employer|
|Runout||Set by employer (typically up to 90 days after the end of the plan year)||Set by employer (typically up to 90 days after the end of the plan year)|
|Rollover & Grace Periods||A maximum rollover of $550 in unused funds can be added to the following year’s plan on top of the contribution limit. There is a 2.5 month grace period to use unused money or expenses. If the plan does not offer a rollover or grace period, it is “use-it-or-lose-it.”||“Use-it-or-lose-it.” Participants must use the money in the account by the end of the year or they lose it.|
|Money Availability||At the beginning of the plan year once the participant has determined their annual contribution amount. The full amount of money is available even if the participant has not yet contributed to the account. This is called “pre-funded.”||The money becomes available as the participant contributes to the account. Thus, the participant only has access to the amount of money actively in their account. This is called “post-funded.”|
Impacts to DCFSAs due to COVID-19
The Coronavirus Aid, Relief, and Economic Security (CARES) Act and recent IRS guidance have added more flexibility to health FSA and DCFSA plans.
Some new rules include:
- New opportunity to increase, decrease, start or stop your FSA elections.
- More flexibility to change dependent care contributions.
Another quick note about COVID-19: While the 2020 COVID relief bill granted temporary, optional exceptions and changes to DCFSAs in 2021 and 2022, Gusto is currently not supporting the following amendments.
- Employers can extend the grace period to 12 months after the plan’s 2021 year-end.
- The American Rescue Plan Act of 2021 increased the annual DCFSA contribution limit from $5,000 ($2,500 for married individuals filing separately) to $10,500 ($5,250 for married individuals filing separately)