Submitted by c_g201022 t3_127oqfz in personalfinance

My husband and I just found out we're expecting our first child and are trying to start planning for daycare, since there's a long waitlist everywhere in our area.

I also just found out that my employer offers a dependent care FSA, which I understand has a yearly contribution limit of 5k. Based on the rates in our area, we'll end up spending approx. $10,660 a year on care.

Just kind of trying to understand how the DC FSA works - do you receive a debit card with the funds deducted from your paycheck that you use to pay the daycare with? If so, I don't really see a downside to doing it, since it would reduce our taxable income by 5k.

Any downsides at all to opening the DC FSA?

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pancak3d t1_jef1v2n wrote

Unused funds expire every year, so don't contribute too much ahead of time

But yes they are a great deal

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kbc87 t1_jef229z wrote

Unless you're paying a nanny under the table to take care of your kid, in which you CAN'T use those funds... do it. It's a good way to pay $5k of daycare without paying taxes on those dollars.

For mine, I have to submit invoices and get reimbursed as the money hits the account each paycheck. I usually wait until I have enough to cover 1 month before submitting. My company uses BASIC and it is super easy and fast. You have until I think March of the following year to submit receipts from the previous year to reimburse.

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Just remember unused funds will NOT roll over.. so if you are due late this year and won't hit $5k, don't contribute that much.

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Alithair t1_jef3c6a wrote

Once you enroll, there are pre-tax deductions from each paycheck into the DC FSA. I didn’t get a debit card for mine but had to electronically submit receipts and invoices.

Unlike a regular FSA where you can access the entire year’s amount right away, you can only reimburse for the amount currently in the DC FSA. $5k annual limit = $416 going into it every month and $10k annual expenses = $833 per month. You can either reimburse yourself $416 every month or $832 every other month. This may vary if you have months where you don’t need to pay for daycare.

IIRC, the DC FSA may decrease the amount you can claim for the child care tax credit.

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sciguyCO t1_jef4ngi wrote

When I had one several years ago, it did not come with any linked debit card. I'd pay daycare out of pocket, request an invoice from them, submit that as an expense to the FSA provider, and they would handled reimbursement as an electronic transfer out of the FSA into my linked checking account.

So it's not quite as easy as you hoped, but it's still a way to get a "discount" on your childcare expenses with only a little effort. You're putting $5k into the FSA, but your take-home pay would likely drop only $3500-$4000 (depending on tax brackets). Your FSA contributions will be untaxed for federal income tax, state (AFAIK any of them) income tax, and payroll tax. So your savings could be in the 20-30% range depending on your income level and state.

A few quirks:

  • The FSA will only reimburse up to the amount of the expense or what you've contributed so far that year, whichever is lower. However, if the expense is high enough that it' doesn't get fully reimbursed, the remaining expense amount should be kept on record and used to pay you as new contributions occur. Ideally this won't require you to submit multiple requests for the same expense.
  • You don't have to submit each expense as they're incurred. You can "roll up" your care expenses during the year until you've built up $5k of payments and submit that as one big request. With $10k / year expected, you'd likely hit that around July, get paid about $2500 (the amount contributed to that point), then get the rest reimbursed as new contributions flow from your paycheck.
  • With a single dependent, the $5k FSA benefit will wipe out any "qualified expense" that you get to claim for the "dependent care credit" on your tax return. But unless your household income is pretty low (<$30k-ish), the tax break of using the FSA is larger than the credit you'd qualify for.
  • You can only select an amount to contribute during enrollment, and that is locked in until your next enrollment period. Any of that $5k you can't claim is lost at the end of the plan year. With your expected expenses, this isn't likely to be a problem, but unexpected situations can crop up.
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EagleEyezzzzz t1_jef8m8f wrote

We just did this for the first time this year. I did the full amount possible, taken out of my paycheck year round. It was great! Reduced our taxable income by $5000. I also did the medical costs one offered by my employer by an additional $3000.

The only downside is that you need to remember to submit documentation in order to get the money back that has been withheld from your paycheck. My employer is great at sending a couple reminders. It took me maybe an hour to gather, fill out and submit. Well worth it.

We just got a check cut to me directly from employer a couple weeks after submitting paperwork.

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remmiz t1_jeffh0f wrote

Most others have said the benefits of them - but something to look for with your FSA provider is a recurring reimbursement form. This allows you to fill it out once at the start of the year then automatically get reimbursed on every paycheck without having to fill out anything again.

Here is the one for WEX (popular provider).

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ReallyGene t1_jefhjsu wrote

We did this with our kid for years, including after-school programs as they got older.

During that time, my employer changed plan providers at least three times.

One made it easy, with a debit card that we would use for payment, others required we scan and submit receipts, and we would get reimbursed, either by direct deposit or a paper check.

There's no downside.

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Fit_Vegetable_4922 t1_jeglofa wrote

As others have said, the main downside is the risk of over contributing and forfeiting the money (happened a lot during covid because day cares closed). Also, it can be a hassle to get reimbursed - make sure to stay on top of the paperwork and don't miss deadlines.

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