Like many families, my husband and I use a Dependent Care Flexible Spending Account to pay for childcare expenses. In our case, our two small children cost a lot. We employ a nanny to care for our younger child, who is too small yet for our chosen preschool, where we send our older child. So our childcare expenses are a combination of nanny pay and preschool tuition.
Our Dependent Care Flexible Spending Account (DCFSA) is provided via his employer. Here’s how it works: we ask his HR department to direct some of his salary into the account, and when we have a childcare expense we file a claim, and the amount of the claim comes to us in a check. At no point do we pay taxes on the money that is funneled through the DCFSA, meaning it gives us a tax break.
I’m thankful for the tax break, but there are a couple of issues with DCFSAs that lawmakers are working to fix:
First of all, there’s a limit for how much money we can put in a DCFSA. It’s $5000. That limit was established in 1986 and hasn’t been changed since. I don’t have to tell other families how woefully inadequate $5000 would be for a year’s worth of childcare. Most families spend more than that today. Thankfully, a bipartisan group of lawmakers recognizes this and has sponsored legislation to double the DCFSA limit to $10,000 per year. This would offer working families a bigger tax break on childcare, one of their largest household expenses.
- Secondly, DCFSA funds, like other FSA funds, are “use it or lose it.” This means that if we set aside $5000 for childcare expenses this year, but end up using (or claiming) less than that for some reason, we watch our money disappear at the end of the plan year. Sometimes plans change. This is especially true in 2020, as Americans grapple with the coronavirus pandemic. Most childcare facilities closed in response. Many Americans lost jobs and rearranged their childcare as a result. There’s now proposed legislation to allow families to “rollover” their 2020 FSA funds to 2021. This commonsense change would save many families the pain of losing unused childcare dollars in 2020 (in most cases for reasons outside of our control).
In my case, my daughter’s preschool closed mid-March and sent parents a partial tuition refund for the end of the school year. My son’s nanny wasn’t sure if she should keep working for us during our state’s shelter-in-place period, but she did, thankfully, which allowed me to continue working. So we will still easily use our FSA funds this year. We are thankful that both my husband and I still have our jobs.
But many, many families are not in this situation. It’s past time to reform FSAs and make them more useful for modern working families.
To read more about the proposed bills mentioned above, click here.
To read more about how to structurally reform FSAs, click here.