Dependent Care FSA Confusion
January 20, 2015 10:06 AM   Subscribe

I signed up for a Dependent Care Flexible Savings Account for 2015. I am struggling to wrap my head around it. Specific questions inside.

I live in Missouri, USA.
Babby is in full-time daycare at a cost of $200/week. For January, that is $880. For February, that will be $800.
I pledged to put $5000 into the FSA for 2015, which is the maximum for married people filing jointly. This is true on both counts, but it's taken from my paycheck alone and I pay for daycare alone from my paycheck (as part of how my husband & I split our finances).
I am paid monthly, so the $5000 split over 12 months is $417/month taken from my paycheck and deposited into the FSA.
At the end of a month of daycare, I submit a form to be reimbursed from the FSA.

I paid for January daycare from my December paycheck. I will pay February daycare from my January paycheck. The January paycheck will be the first showing the deduction for the FSA. I will then submit the form for January care to be reimbursed in early February.

Questions:

1. Does this sound right? The amounts are right, but is the logic correct? Was I right to sign up for the maximum pledge given the amount I'm paying for daycare? (I did so after discussions with a benefits officer on my campus.)

2. Looking at the form, it asks how much I request for my claim of January. Do I request the $417 that was deposited for January?

(most important/most confusing)
3. Taxes. Where & when will I see the tax savings from doing this? Is it that I am just paying fewer taxes on my paycheck each month, and the money saved from taxes ends up in my paycheck?
Or do I have to wait until I do 2015 taxes to see the savings? But that's the point of the FSA, that I don't have to wait until I get the tax refund to see the savings. Right?
If it's the former, then my paycheck is $471 lighter because of the deposit to the FSA, but then at the same time, that would be offset by the tax savings in the same paycheck. The savings are dependent on our joint tax rate, but the estimate calculator on the FSA site says it could be $2500/year, which is $208/month. So my paycheck would be (roughly) $X - $471 + $208. Is that about right? The $208 amount seems high, though.

Gah. I am confused. Please shed some light on this for me!
posted by aabbbiee to Work & Money (18 answers total) 2 users marked this as a favorite
 
Do you have to wait until the end of the month to submit for reimbursement? I always submit for the full amount as soon as I pay for care,, and payments start flowing as funds become available with each paycheck. So for me it works something like this:

December 26- Pay $XXX for baby #2 January 2015 daycare, get receipt
January 5- Submit form and receipt for for $XXX of care for January 2015.
A few days later- Get email saying that FSA claim was accepted and awaiting funds.
January 15- Payday. ~$208.33 gets put in the FSA.
Late January- I get a check or direct deposit of the $208.33. The rest of the $XXX will come after subsequent paydays.
posted by ThePinkSuperhero at 10:13 AM on January 20, 2015 [2 favorites]


The forms are clear that I can only submit a claim for services that have already been provided, not for services to be provided in the future.
posted by aabbbiee at 10:16 AM on January 20, 2015 [1 favorite]


Yep, it works the same for me as for ThePinkSuperhero. It might help to think of the money you're depositing as pre-tax money. It comes off the top of your paycheck before any taxes come out.
posted by woodvine at 10:17 AM on January 20, 2015 [1 favorite]


1. Yes, (probably*); you are paying about $10,400 a year (52 x $200), so your costs are more than $5000, so you should use the full amount.

2. Yes (but see comment above and check with your payroll office to determine the best way to do it).

3. The $417 is tax exempt, so the savings is that you don't pay income or payroll taxes on the money. A slightly more detailed explanation is here.

*It's possible but quite unlikely that it would be better to take the full Child and Dependent Care credit rather than the DCFSA. Details if you are interested, but probably best not to worry about it.
posted by Mr.Know-it-some at 10:18 AM on January 20, 2015


Yeah, I usually only have to put in the first day of care on the form though. So If I pay for the first two weeks of February on January 30, then I can submit the claim on February 1, or whatever day the first day of daycare is.
posted by woodvine at 10:19 AM on January 20, 2015


Does this sound right? The amounts are right, but is the logic correct?

Yes, you were correct to pledge the full FSA amount. If you know you are going to expend the money (which you are - your kid is likely not going to stop needing day care), you might as well pay for it out of tax-advantaged money rather than taxed money. If you were paying for a health cost that wasn't necessarily going to happen (like optional surgery), the question is not as clear.

Although it's perfectly fine to always be reimbursed a month late, it's likely your plan will allow you to pay for expenses immediately after the money is available in your FSA. Sometimes people will use this to slightly game the FSA/HSA system - they'll fund their FSA/HSA with exactly the amount of an expected expense on the paycheck right before they need it, then immediately withdraw the money.

Do I request the $417 that was deposited for January?

Yes, since it sounds like the FSA is starting out "empty". However, if the FSA has existing funds for some reason or another, you can request more than $417 and empty out the account.

Where & when will I see the tax savings from doing this?

The FSA contribution decreases your taxable income. If you were making, say, $5,000 month gross, you will now be taxed on $4,583, so each paycheck will have less taxes paid on it. You will, of course, also get paid $417 less, but the net "cost" to you is less than $417 due to the tax savings. In other words, you can either view it as paying the same amount for day care and then getting paid more each month, or you could view it as paying a decreased amount for day care and getting paid the same every month.

Or do I have to wait until I do 2015 taxes to see the savings?

The answer to the question that I think you're asking is no - you'll see your paycheck immediately change. However, this all assumes your tax withholding is exactly correct and your paycheck deductions cover exactly your tax liability. If you have a complicated tax situation, your paycheck deductions may not cover your tax liability, and you will need to account for that.

The $208 amount seems high, though.

This amount should be precisely your marginal tax rate (federal tax rate + social security + disability + state income tax). This implies a marginal tax rate of $208/$417 = 49.9%. That's definitely possible if you're in the 28% or 33% tax bracket (single income > $90K, married income > $151K) and in a state with income tax. If you're not, that seems too high.
posted by saeculorum at 10:20 AM on January 20, 2015


Do I request the $417 that was deposited for January?

Yes, since it sounds like the FSA is starting out "empty".


No, this is incorrect. You submit for what you paid, not what's in your account. They'll queue up payments as funds become available.
posted by ThePinkSuperhero at 10:31 AM on January 20, 2015 [4 favorites]


No, this is incorrect. You submit for what you paid, not what's in your account.

I'm a bit confused here - the OP is paying more than $417/month for day care. They can submit a request for reimbursement for the minimum of the amount in the account or what they paid for the care. This allows the OP to draw down the account balance by submitting requests for reimbursement exceeding their contribution until the account balance is $0.

Is there something distinct about dependent care FSAs regarding this? I'm not aware of any, but I'm much more familiar with "standard" FSAs/HSAs.
posted by saeculorum at 10:35 AM on January 20, 2015


Think of a dependent care FSA as a debit card, whereas a healthcare FSA is a credit card with a limit.

So, while Health FSAs allow you to use the whole amount up front, dependent care do not. That means that, with each of my 24 paychecks/year, I put $208.33 into my FSA. Our routine is this:

1. Get billed for Jan.
2. Pay for Jan.
3. Jan 31 -- File for Jan
... etc.

With my health FSA, I can have surgery that costs $2500 on Jan 2, quit my job on Feb 15, and I won't owe my company anything.
posted by michellew at 10:53 AM on January 20, 2015


Ours works like this:

We pay, sigh, 12 x $1100 to daycare.
We submit the receipt for $1100 each month for five months.
We get $416.66 back each month for 12 months.

Boom, $5k (ok, $4999.92) in tax-free money.
posted by chesty_a_arthur at 10:53 AM on January 20, 2015 [2 favorites]


Michellew is correct that Flexible Spending Accounts work differently and are front-loaded. But a Dependent Care Account, like a Health Savings Account, is funded per pay period.
posted by chesty_a_arthur at 10:55 AM on January 20, 2015 [1 favorite]


I work for a company that administers Dependent Care FSAs. Since you elected $5000 for your DC FSA, that amount will be deducted from your paycheck in equal amounts according to your payroll frequency. If you are paid bi-weekly, that would be 5000/26. If weekly, 5000/52. Your taxable income will go down by the amount of the DC FSA withholding, so you may see a difference on your paycheck, and you will definitely see a different in your tax returns. Your taxable income will be $5000 less, so your tax burden will be less.

As far as submitting claims is concerned, Dependent Care accounts are "deposit-driven", which means your claims will only be allowed if there is money in your account to cover them. I'm leaving the math for how to submit claims for reimbursement up to you. I am not your accountant.

Here is an article that explains Dependent Care accounts.

http://www.practicalmoneyskills.com/personalfinance/lifeevents/benefits/dependentFSAs.php
posted by Billiken at 11:02 AM on January 20, 2015 [3 favorites]


If it helps you keep track of the math, you don't have to submit your claims every month (assuming you can float the cash). You can submit quarterly, at the half year mark, or at the end of the year. Or however you see fit.

For example, we get such a minimal amount back that it's not worth my time to submit my request and keep track of the deposits on a frequent basis, so we just got a total receipt for the year from our daycare in December and submitted one request for our total amount due with that receipt. Then I just have to keep track of receiving that one deposit.
posted by vignettist at 11:59 AM on January 20, 2015 [1 favorite]


As vignettiest said, you don't have to submit every month, you can let a bit build up and submit a form for the current amount. I find it easier to do the paperwork every 3 or 6 months instead of every month. But if you need that extra cash, then you can do it monthly also.

A few things I learned. Check how much can be rolled over each year. If you can't roll over anything make sure you file the paper on time by the end of the year otherwise you risk losing the money. We can roll over a decent amount, but I don't know if that's a requirement of federal law or how our plan works.

Also, look into the required paperwork for submitting a claim. For us we can either submit receipts from the daycare or create a submission on the website. It turns out the receipts from our daycare didn't have the required fields for the plan and they would occasionally reject my submissions, so I have to fill out a form with dates and amounts, online, print it out, have daycare sign it, and then fax or upload a copy. It's a bit of a hassle which is why I don't do it monthly.
posted by beowulf573 at 12:18 PM on January 20, 2015


saeculorum's response was very helpful (especially on question 3), so I didn't understand ThePinkSuperhero's correction until I saw chesty_a_arthur's comment.

Is this the idea? I want to submit claims for the whole amount paid each month so that the company will automatically send me my deposits when they come available. After 7 months of claims forms, I will have claimed the whole $5000, and I'll get all of the money back incrementally through the rest of the year without any more forms. Is that right?

Sorry, I need this explained like I'm 5 years old.
posted by aabbbiee at 3:33 PM on January 20, 2015


Yes.

I just submit receipts as soon as I get them until I hit $5K, then I stop because there's no point in submitting further receipts.

Then the FSA direct deposits $208.33 into my checking account the day after each payday (I get paid bimonthly) for the entire year.
posted by rabbitrabbit at 3:45 PM on January 20, 2015


Yup, that's how it works for me, too.
posted by ThePinkSuperhero at 4:31 PM on January 20, 2015


Works that way for me too. I file once and they just send checks as the funds are drawn into the account from my paycheck each pay-period.
posted by annie o at 8:53 PM on January 22, 2015


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