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A Dependent Care FSA plan allows employees to defer pre-tax earnings to pay for eligible expenses towards dependent care.  This is similar to the “Child Care Credit” program were eligible expenses are reported on an IRS 1040 form.  The guidance is from many tax professionals is a Dependent Care FSA is more advantageous if your annual income is above about $40,000.

Not all generic dependent care expenses are eligible to be reimbursed through a Dependent Care FSA.  Some of the rules include, child dependents that are not disabled, must be under the age of 13.  Day care expenses are allowed, but not any child program where there is an overnight stay required.  The one rule many are not aware of is if the employee is married, both parents must be working or actively looking for employment. 

Non-Discrimination Testing

The Dependent Care FSA (Section 129) has an additional test (benefits test) that may cause problems.  First, the test results that matter are the test at the end of the plan year.  Many administrators perform the test at the beginning of the plan year and do not retest causing a problem if the enrollment changes during the plan year.  Second, this test involves testing the ratio of benefits for the Highly Compensated Employees vs. the Highly Compensated Employees.  If you company has a large population of Highly Compensated Employees then a Top Paid Group election may work better for you.  We highly recommend you also perform a mid-year test so you do not have a messy tax problem at the end of the year.

For more information, please contact Bridgeport Benefit Advisors.

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The material on this page is intended as general descriptions of the concepts presented.  It is for educational purposes only and it not intended to provide specific financial or tax advice.  These descriptions cannot take into account your specific conditions and situation including the data required for underwriting purposes, financial circumstances, risk tolerance, and other factors.