Family Finance Friday – Dependent Care FSA Shenanigans

I despise the government, I really do…BOTH sides of the aisle.  Anyway, a dependent care FSA, for those not using it, is a Dependent Care Flexible Spending Account that offers some tax benefits for eligible dependent care services. The FSA works by pulling out a portion of your income into a special FSA account before taxes are withdrawn. YAY, money saved, right? Well, it’s a government program designed to help us, so naturally it’s going to be a pain in the backside. We don’t do politics on this blog, but I think most would agree that government is not…efficient, to put it kindly. It doesn’t matter what side of the aisle ‘help’ comes from, I find it safe to assume that the relief will come with some stress attached.

First, some more details: as I said, the DCFSA allows some of your income to escape taxes (a good thing). The tax-free income must then be applied only to eligible expenses such as daycare, babysitting and nanny expenses, summer day camp, and even elder care. The account is limited to $2500 per year on a separate tax return or $5000 per year if you are filing a joint tax return or if you files as single or head of household. Our experience with this FSA relates to our daycare bill, which will be exceeding $20,000 this year (because who needs money for anything else?). Ultimately, assuming one’s limit is $5000, something around $1200 or $1300 can be saved by avoiding taxes.

Perhaps I am just an unappreciative and unworthy citizen, but I’m still going to find some room to complain about a program saving me over $1000 per year. First, I reject the premise of all FSAs, HSAs, HFSAs, DCFSAs, YMCAs, FFAs…or whatever they’re all called. While I will utilize these programs and recognize their benefits, it all goes back to convenience. Just like with health insurance these days, all of these reimbursement accounts are obnoxiously time intensive. If I want to utilize these benefits, I need to stuff another half dozen cards into my bulging wallet and annually fight a small army of customer service representatives to manage my ‘benefits’. I’ll probably wage this war in more detail in another post, but these benefits just remind of the instant rebate scams companies ran through the 1990s (and many still do today). Make it as difficult as possible to claim the benefit and scare away half the people it could help!

Again, I confess that these are actual benefits that I’m complaining about. So it would be fair to say “can it Micah” and offer to take my portion of the benefits. Still, I find it all so irritating. Anyways, here is how the FSA infiltrates our lives. First, the Dependent Care FSA must be weighed against the childcare credit on tax filings. So the whole foundation of this FSA is that it might help me and I need to speak with a tax advisor to figure it out. So let’s assume I’ve deduced that the dependent care FSA is advantageous to me (admittedly, it usually is for most families). First, I go through all the paperwork at my employer (although smaller organizations will likely not have the HR resources to accurately answer questions even if they offer the option).

So the paperwork is filled out, my contribution rate is calculated, and my paycheck is now doctored to the correct amount. So, in order for us to use the card, we have to go through a never ending reimbursement cycle or alternate back and forth on our weekly daycare bills. Since the total daycare bill cannot be paid by the FSA, we are left with partial or sporadic payments from the FSA alongside our normal daycare payment options. We might also funnel a stream of reimbursements using receipts, daycare approval signatures, and more and more paperwork. It’s a complicated mess. It saves money so I begrudgingly accept it…but I don’t have to like it!

While I have some legitimate ideas on replacing the FSAs, I think I’d prefer to just have a magic money fairy dropping cash into my lap on a daily basis. I think that’s a government program I can get behind. Something like the tooth fairy, except rather than losing teeth to earn stipends under the pillow, we just have to be sleep-deprived, budget-strapped parents. That daycare bill stressing you out? No worries, the Dependent Care Fairy will visit tonight! Diaper expenditures reaching five figures? Have no fear, the real Diaper Genie will appear.

In all seriousness, the DCFSA is a solid option for those with dependent care expenses. If your employer offers this FSA, suck it up and go save some money! If they don’t, it might be worth a conversation with your executives or human resources team. Kids are expensive and every little bit helps…in lieu of a magic money fairy, I suppose even inefficient government nonsense can help.

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