Your employees have responsibilities and concerns beyond outside of their 9 to 5 jobs. While they’re at work, they still have to meet the needs of their dependent children and elders. A Dependent Care Reimbursement Account (DCRA) is a pre-tax benefit account that your employees can use to pay for dependent care services while they’re at work. The IRS defines qualifying dependents as children under age 13 and adult dependents who are unable to care for themselves. Qualifying dependents must live in the same household as the employees and be claimed as a dependent on their tax return.
How does it work?
Employees may enroll in or renew their Dependent Care Reimbursement Account during open enrollment each year. Your Sheakley Benefits Administrator will work with your HR or benefits department to plan for and execute a smooth enrollment, including providing updated educational materials and answering any questions you and your employees may have so they can take full advantage of this valuable benefit.
A DCRA is employee-funded. Since employees set money aside pre-tax, they can end up paying less in payroll taxes and increase their take-home pay. All DCRA expenses must be work-related, meaning that the expense was incurred while you or your spouse were working or looking for work. For the purposes of DCRA, unpaid and volunteer work do not qualify as work. Check out Benefits to Help You Recruit and Retain Top Talent to learn more about selecting the right benefits for your company.
Free money in your employee’s pocket
When employees set aside money in their DCRA, they can save up to 30% in taxes versus paying daycare costs out-of-pocket. With a DCRA, you pay your daycare provider up-front and are reimbursed with your DCRA’s pre-tax dollars. To be reimbursed, just submit your daycare receipts and supporting documentation to your plan administrator – it’s that easy.
For married couples filing jointly, the IRS allows families to set aside $5,000 for dependent care. For single individuals, unmarried couples, and married couples filing separately, the IRS limits dependent care contributions to $2,500 annually.
Budget for daycare expenses
Dependent Care Reimbursement Accounts allow for tax-free reimbursement of eligible daycare expenses or custodial care expenses for each employee’s tax dependents. DCRAs can cover a wide range of dependent care services, including preschool, summer day camp, before- and after-school programs, babysitting, and child or elder daycare.
If your employees are entitled to a personal tax exemption for a dependent child under age 13, they may qualify for a DCRA. If your employee is divorced, they may still be permitted to use a DCRA to pay for qualifying expenses. If you’re interested in providing the best mix of benefits to your employees, check out The Rising Cost of Benefits.
Not just for childcare
The DCRA can be used to pay care expenses for all income tax dependents while an employee is at work, including daycare for immediate adult family members. Qualifying adult family members must be mentally or physically incapable of self-care; be the spouse, child, or income tax dependent of your employee; and live in the same household as your employee. DCRAs are for custodial care only and may not be used to cover health care services, such as an in-home nurse.
Use it or lose it
Since DCRAs are subject to the IRS’s “use it or lose it” rule, it’s important that your employees accurately calculate how much to contribute to their account, erring on the side of caution. The money that they contribute to their each year must be used within that plan year.
Typically, any money left unclaimed at the end of the plan year is forfeited, so it’s crucial for your employees to determine how much they expect to spend on dependent care each year before the plan year begins. If an employee’s situation or the amount they pay in childcare changes, they may be eligible to modify their DCRA election due to a qualifying life event. Check out Flexible Spending Account Basics to learn more about helping your employees budget for future expenses.
Offering much-needed benefits to your employees
Choosing the right flexible benefit plans for your employees can be a daunting task for many small and mid-size employers – that’s where we come in. Sheakley’s Flexible Benefits experts provide the advice and support you need to select the right mix of plans that meet the needs of your company and employees. In addition to comprehensive plan management, Sheakley’s team provides training and educational opportunities to help your management team and employees better understand and utilize their benefits.
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