What
DCSA Does
An
employee who has to pay for care for dependents in order to work
may want to take advantage of the Dependent Care Spending Account
(DCSA) plan. Money contributed to a DCSA is free from federal
income, Social Security, and Medicare taxes and remains tax-free
when it is received. These contributions may also reduce
the member's federal tax liability for the year in which they
are deducted.
How Much May Be Deducted
The
plan allows a member to set aside up to $5,000 of salary before
taxes each calendar year to pay for qualified dependent care expenses. The
member then files claims for reimbursement of eligible expenses. When
a claim is filed, the member cannot be fully reimbursed until
the payroll deductions to date are at least equal to the amount
of the claim.
Who Are Eligible
Dependents
Eligible
dependents include an employee's children under age thirteen,
the employee's nonworking spouse, civil service partner, or eligilbe same-sex domestic partner if physically or mentally incapable
of self-care, and any other person considered a dependent for
tax purposes who is incapable of self-care and who normally spends
at least eight hours each day in the employee's home.
Types of Services
Eligible for Reimbursement
The
types of services eligible for reimbursement include a qualified
day care center, nursery school, or summer day camp (not overnight
camping); a baby-sitter, if needed to allow the employee to work;
a housekeeper whose duties include day care; and someone who cares
for an elderly or incapacitated dependent. For a complete
list of dependent care expenses, see IRS Publication #503, Child and Dependent Care Expenses.
DCSA Compared to
Federal Tax Credit
A
member can use the federal tax credit instead of the DCSA. Generally,
if a member's adjusted gross income is more than $24,000 a year,
using the DCSA will result in greater savings. It is important
to remember that any payment received from the DCSA will reduce
dollar-for-dollar the amount that can be considered for tax credit
and vice versa. Each employee must decide which method would
work better based on income and personal tax status.
Very Important Note:
Under
the DCSA, any unused contributions remaining in an account at
the end of the calendar year are forfeited. Members have
until March 31 of the following year, three months after the close
of the calendar year, to file for eligible reimbursement.
Social Security Implications
Since
payments to a Flexible Spending Account
(DCSA or UMSA) and POP
lower annual earnings against which Social Security deductions
or employer contributions are made, there is a valid concern that
participation in these plans would result in reduced Social Security
benefits at retirement.
If
a person were born after 1928, the Social Security benefits are
calculated using a 35-year average of earnings. A reduction
of $2,000 a year or even $5,000 a year over some portion of this
35-year span would have little effect on the average salary and,
therefore, minimal impact on the Social Security benefits.
To
illustrate possible Social Security implications, the Social Security
Administration has provided the Division of Pensions and Benefits
with the example of an employee who retired in 1998 at age 65,
whose wages had been at the maximum wages subject to Social Security
deductions. Upon retirement, this individual's monthly Social
Security allowance was $1,343. If that same person had been
contributing $2,000 a year for the last 10 years to an FSA,
the subsequent reduction in Social Security wages would have produced
a monthly Social Security allowance of $1,335, a difference of
less than $10 per month.
Fact
Sheet #44, Tax$ave, and the annual Tax$ave
Open Enrollment newsletter provide additional information
about the UMSA and the DCSA.
Additional
information about Flexible Spending Accounts