As a business owner during these turbulent times, you may be pondering creative ways to attract and retain quality staff by offering benefits that make you stand apart from competitors in the hiring market.
Many business owners are already familiar with Health Savings Accounts (HSAs), whether we are offering this through our business or making contributions privately. An HSA is essentially a bank account where you can deposit pre-tax dollars that you can use to help pay for various medical expenses. They have grown in popularity since the COVID-19 pandemic when American were worried about getting sick and new accounts opened during that time increased by 8%.
However, there’s another benefit that’s not new by any means and can benefit the majority of your workforce…a Dependent Care Flexible Spending Account.
What is a Dependent Care FSA?
A Dependent Care FSA (DCFSA) is a flexible spending, pre-tax account used to pay for eligible dependent care services, such as preschool, summer day camp, before or after school programs, and child or adult daycare. Basically, a way to save your employees’ tax dollars, while taking care of their loved ones while they work.
With a DCFSA, pre-tax dollars are used to pay for qualified out-of-pocket dependent care benefits up to $5,000 per year for single or married couples.
What’s attractive about the DCFSA is that it not only covers minor children’s expenses but also covers qualified dependent care expenses if they have an adult parent or relative under their care living in the home. Another benefit is that they can contribute to both an HSA and DCFSA at the same time.
Unfortunately, unlike the HSA, the only way to obtain a DCFSA is if you, as the employer, offer the benefit.
What are Qualified Dependent Care FSA Expenses?
For children under the age of 13, expenses include many things they may already be paying for such as before and after school care, babysitting and nanny expenses, daycare, preschool, and summary day camp.
However, as mentioned above, it also includes care for an adult loved one who may be physically or mentally incapable of self-care and lives in their home when services are provided by a qualified caregiver.
What’s not included and are there other drawbacks?
Although the DCFSA covers a multitude of dependent care expenses, it does not cover activity fees (sports, dance lessons, music lessons, etc.), babysitting for non-work related purposes, or babysitting performed by another tax-dependent, elder care that’s not work-related, private schools, overnight summer camps.
While there are many positives, there are also some items to be aware of. FSAs are use-it-or-lose-it accounts. The funds don’t roll over from year to year. Careful budgeting will be required to ensure the staff are contributing for expenses they actually have. If they overcontribute to the account and are left with unused funds, they will lose that money at the end of the year.
To qualify for the FSA, the employee, if married must have a spouse that also works (or is unable to work due to a disability). If the employee is divorced, only the custodial parent can have the FSA.
How much will this cost the company and do you enroll?
While there’s an approximate cost of $60/employee per year to administer this plan, there’s also a tax benefit received as employers avoid the 7.65% (social security & medicare) tax on the amount employees contribute to the FSA.
To enroll, you will want to seek the services of a reputable third-party administrator to handle the details. Your employees will only be able to enroll during the annual enrollment period with a few exceptions.
For more information, or to schedule a business planning consultation with one of our team members, please call us at 352-683-7365. Let’s discuss your financial/retirement future, discover ways to minimize your tax burden, and use creative out-of-the-box thinking to attract top employment candidates during this competitive time.