If you offer a Dependent Care Flexible Spending Account, (DCFSA) you know it can provide a lot of really great child care benefits. And you probably also know that the limits on the account have been stuck at $5,000 for those married and filling jointly, or $2,500 for single taxpayers.
But why?
Given the fact that child care costs are continuously on the rise, why doesn’t the limit ever go up?
Stymied by legislation
The first reason is that massive legislative overhauls are few and far between. Which can be frustrating in cases like these, especially since these accounts help people to:
- Look for work
- Subsidize child care costs
- Find support while in school
- Care for the elderly or differently-abled
While the nation at-large cares about affordable child care, Congress can’t seem to undo a decision made 30 years ago. A decision that has led to the Dependent Care FSA limits being stuck at $5,000.
The real reason the limits are stuck
They were never made to go above that. In other words, they weren’t designed like all the other pre-tax accounts were. They were grafted into that and purposed for it later.
The inauguration of the DCFSA was in the 1980s. Congress wanted to make it easier for employers to provide on-site child care for employees. Part of this arrangement was supposed to involve employers subsidizing the costs involved.
There was one catch, though: That $5,000 wasn’t indexed for inflation, and it hasn’t budged since.”
Then, as this excerpt from the New York Times shows, things took a slightly different direction than planned and never went back:
“Through a bit of interpretive magic, however, benefits consulting firms saw an opening to administer savings accounts that employees would fund themselves with pretax money from their paychecks. Employers would hire the firms to run the accounts. After a few years of fits and starts, the accounts received an official blessing in Washington and the $5,000 limit became part of another bit of tax legislation in 1986.
There was one catch, though: That $5,000 wasn’t indexed for inflation, and it hasn’t budged since.”
So there you have it. The Dependent Care FSA account wasn’t designed for what it’s being used for today. The result? An account that can only help to defray a portion of the costs associated with child care. But it’s better than no account at all, right?
Where does this leave child care?
The adage “Do the best you can with what you have” rings true here. Because this account probably won’t change any time soon.
In the meantime, get the most out of your Dependent Care FSA, and reduce your out-of-pocket expenses. Pennies, nickles, and dimes add up to saving a good chunk of money every year.
BRI Pro Tips:
- This is an FSA account, so funds DO have a use-it-or-lose-it policy. Encourage employees to plan out expenses.
- Don’t forget employees can use these funds for summer camp expenses or even child care registration fees!
- DCFSA’s are not pre-funded. That means your employees can only be reimbursed up to the amount that was deducted from their paycheck.
Check out our blog on the right way to use Dependent Care FSA funds.
