For many working parents with young kids or other family needs, dependent care services, from preschool and day camps to after-school services, are necessary resources to help get through day-to-day life. But these essential services can also be expensive.
If your military family is navigating these costs, a Dependent Care Flexible Spending Account (DCFSA) is a valuable option to help cover the expenses, tax-free. With a DCFSA account, you can allocate pre-tax income for eligible dependent care services, which can help you save money and budget more effectively, while ensuring sufficient care for your dependents.
How the DCFSA Works
Department of Defense civilians, regular (active) component servicemembers, and Active Guard Reserve members on Title 10 orders who have dependents are now eligible to enroll in a pre-tax DCFSA to pay for eligible dependent care services such as child or adult day care. Eligible servicemembers can enroll online in the DCFSA at FSAFED and elect a portion of their monthly pay to be set aside for various reimbursable dependent care services established by the IRS, such as nursery school, payment processing fees and senior day care. The portion of your salary apportioned for the DCFSA will be deducted before taxes are taken out, which decreases your overall taxable income and the income tax you may owe. You can decide how much you want to contribute based on your family’s budget and need for dependent care, but the maximum annual contribution is $5,000. If your spouse is a full-time student or is unable to care for themselves, they will be treated as having an income of $250 per month if they are your only DCFSA-qualifying dependent. If there are two or more qualifying dependents in your household, they will be treated as having an income $500.
To qualify for this program, any/all dependents must be under 13 years old, or a physically or mentally incapacitated spouse/relative who lives within your home. For reimbursement, submit your eligible dependent care claims with proof of services received via FSAFED.
Maximize Your DCFSA Benefit
Because contributions go straight from your paycheck to your DCFSA before taxes are deducted, less of your income is subject to taxation and you keep more of your paycheck.
Open Season
You can optimize the effect of your DCFSA’s savings by keeping the program’s rules and constraints in mind. DCFSA enrollment must be renewed each year and can only be renewed or begin during the annual open season, from mid-November to mid-December. Once you’ve enrolled, your DCFSA becomes effective January 1 of the next calendar year. However, experiencing a qualifying life event such as a child’s birth or Permanent Change of Station (PCS), will allow you to enroll outside of the open season. If you are enrolling as a new hire prior to October 1, you must enroll within 60 days of your date of hire.
Use It or Lose It
Because the funds you designate for your DCFSA do not roll over to the following year, you must either be sure to use the funds you’ve set aside or be prepared to lose them. However, while the DCFSA plan year mirrors the tax year, which is January 1 through December 31, there is a grace period until March 15 of the following year, during which you can use your funds for care services, as long as you submit your related claims for reimbursement by April 30. Any residual funds in the DCFSA after this date will be forfeited.
If you separate or retire before the end of the year, the remaining balance from your DCFSA can still be used for eligible expenses either until the balance has been exhausted or the calendar year ends. However, the grace period does not apply in this situation. It is imperative to plan your expenses in advance and have an accurate understanding of how much of your dependent care funds you will need to avoid forfeiting leftover contributions at the end of the year.
Dependent Care Through Changing Times
There are many periods of a military family’s life when dependent care is especially necessary or helpful — from relocations and times of transition, such as when you or your spouse are adapting to a new schedule, to searching for a job or pursuing further education. Being able to afford quality care for your family members allows you to focus on the added responsibilities that come with those periods of uncertainty.
A DCFSA can also be a useful budgeting tool because it involves planning anticipatory dependent care expenses ahead of time to reduce your out-of-pocket costs by automatically deducting the pre-tax funds from your paycheck. By having a DCFSA to support your dependent care budgeting, you may find you’re better able to effectively manage all other aspects of your budget as well.
Learn More About How a DCFSA Can Help You Save
To provide additional insight on how a DCFSA works and why it may be a good option for your military family, Sarah Bumgardner, Armed Forces Mutual’s Director of Partnerships and Member Engagement, spoke with Amy Marotto, Member Benefits Team Lead. In their discussion, they cover how the benefit works, the potential savings (up to 30%), and tips on how and when eligible servicemembers can enroll.
Watch their conversation below to learn more.
We Can Help
Interested in learning more tips and tools to manage your finances? Check out our Financial Readiness for Military Families resource page or contact the Armed Forces Mutual Member Benefits team at 800-522-5221 or [email protected].
This article was originally published November 30, 2023.