Dependent Care Flexible Spending Accounts (FSAs) are a valuable benefit that allows employees to set aside pre-tax dollars to pay for eligible dependent care expenses, such as daycare, preschool, and after-school programs. This can significantly reduce your overall taxes while managing the costs of childcare. However, for married couples, navigating the rules of Dependent Care FSAs can be a bit more complex. A common question arises: can both spouses contribute to a Dependent Care Assistance Program? This article will clarify the key considerations for married couples regarding Dependent Care FSAs, ensuring you understand the contribution limits and eligibility requirements to maximize this benefit.
Combined Contribution Limit: The $5,000 Rule for Married Couples
The first crucial point for married couples to understand is that the IRS sets a combined annual contribution limit of $5,000 for Dependent Care FSAs. This limit applies to couples who are married filing jointly. It’s not $5,000 per spouse; it’s a total of $5,000 that can be contributed between both spouses in a calendar year.
This rule, established under Internal Revenue Code §129, means that if both you and your spouse have access to Dependent Care FSAs through your respective employers, you must coordinate your elections. You cannot each contribute the full $5,000. Careful planning is essential to ensure you don’t exceed this combined maximum.
Here’s a breakdown of the contribution limits based on filing status:
- Married Filing Jointly: $5,000 combined limit for both spouses.
- Married Filing Separately: $2,500 individual limit for each spouse.
It’s also important to note that your Dependent Care FSA benefit is further capped by the earned income of the lower-earning spouse. For instance, if one spouse earns significantly less and their annual earned income is only $3,000, the maximum combined Dependent Care FSA benefit for the couple is limited to $3,000, regardless of the standard $5,000 limit.
While the American Rescue Plan Act (ARPA) temporarily increased the Dependent Care FSA limit to $10,500 (or $5,250 for married filing separately) for the 2021 tax year, these limits have reverted back to the standard $5,000/$2,500 for 2022 and subsequent years. Furthermore, the $5,000 limit is not adjusted for inflation and can only be changed by an act of Congress, as confirmed by the IRS.
What Happens If Married Couples Exceed the Combined Limit?
Sometimes, due to a lack of awareness of the combined limit, married couples might inadvertently make Dependent Care FSA elections that exceed the $5,000 threshold. For example, both spouses might independently elect the full $5,000 through their employers.
When this situation arises, it’s important to address it promptly. While the IRS has indicated some flexibility in allowing employees to correct mistaken elections in certain situations, it’s crucial to understand the implications and potential corrective actions, which often involve working with your employer’s benefits administrator.
The “Employment-Related Expense” Rule: Both Spouses Generally Need to Be Working
Beyond contribution limits, another key aspect of Dependent Care FSAs for married couples is the “employment-related expense” rule. For dependent care expenses to be eligible for reimbursement, they must be considered “employment-related.” This means the expenses must enable both the employee and their spouse to be gainfully employed.
In most cases, this necessitates that both spouses are working to have eligible Dependent Care FSA expenses. However, there are important exceptions to this rule:
- Spouse Actively Seeking Employment: If your spouse is not currently employed but is actively looking for gainful employment, dependent care expenses can still be considered employment-related.
- Spouse is a Full-Time Student: If your spouse is enrolled as a full-time student, they are treated as being gainfully employed for Dependent Care FSA purposes.
- Spouse Incapable of Self-Care: If your spouse is physically or mentally incapable of self-care, and shares the same principal residence as you for more than half the year, they are also treated as being gainfully employed.
Therefore, if your spouse is a stay-at-home parent and not falling into one of the exceptions above, you generally cannot utilize a Dependent Care FSA, as the childcare expenses would not be considered employment-related.
Unfortunately, if an employee mistakenly enrolls in a Dependent Care FSA when their expenses are not employment-related, there is generally no IRS provision for retroactively undoing the election based on a “mistake of fact.” In such cases, while you might be able to stop future contributions, the “use-it-or-lose-it” rule will apply to any funds remaining in the FSA at the end of the plan year (after any grace period or run-out period).
Dependent Care FSA and Special Spousal Situations
Let’s delve deeper into the exceptions where a spouse is not traditionally employed but is still considered “gainfully employed” for Dependent Care FSA eligibility:
Spouse is a Full-Time Student
When a spouse is a full-time student, the IRS considers them to be working. This means that even if your spouse is not working a traditional job but is attending school full-time, your dependent care expenses can still qualify for FSA reimbursement.
To be considered a full-time student, your spouse must be enrolled at a qualifying educational institution (high school, college, university, trade school, etc.) for the number of hours or courses deemed full-time by that institution. This full-time student status must be maintained for some part of each of five calendar months during the year, though these months don’t need to be consecutive. Note that on-the-job training, correspondence courses, and online-only schools generally do not qualify.
Furthermore, for the purpose of the earned income limitation, a spouse who is a full-time student is deemed to have a monthly earned income of at least $250 if there is one qualifying child, or at least $500 if there are two or more qualifying children.
Spouse is Incapable of Self-Care
Similarly, if your spouse is physically or mentally incapable of self-care, they are also treated as being gainfully employed for Dependent Care FSA purposes. This exception applies when your spouse cannot care for their hygiene or nutritional needs, or requires constant attention for their own or others’ safety due to a physical or mental defect. This is a stricter standard than general disability definitions. Simply being unable to perform household chores or care for children due to a condition does not automatically qualify as being incapable of self-care.
As with full-time students, a spouse incapable of self-care is also attributed a minimum monthly earned income for the lower-earning spouse limitation ($250 or $500 depending on the number of qualifying children).
Spouse on Parental Leave or Summer Break: Generally Ineligible
Conversely, if either you or your spouse are on parental leave or a summer break (common for teachers), dependent care expenses are generally not eligible for FSA reimbursement. This is because during these periods, the childcare expenses are not enabling both parents to be gainfully employed.
Spouse is Self-Employed: Eligible
Self-employment is considered gainful employment for Dependent Care FSA purposes. Therefore, if your spouse is self-employed, your dependent care expenses can still be eligible, provided they meet the other requirements. The spouse’s net earnings from self-employment will be considered for the lower-earning spouse income limitation.
Determining Eligible Dependent Care FSA Expenses and Employee Responsibility
Ultimately, determining whether your dependent care expenses are eligible for Dependent Care FSA reimbursement is your responsibility as the employee and taxpayer. It’s an individual income tax matter to be resolved by you. When in doubt, consulting a personal tax advisor is always recommended to ensure compliance and maximize your benefits correctly.
When you submit a claim to your Dependent Care FSA administrator, you will be required to certify that the expenses are eligible. While the administrator generally won’t conduct extensive investigations unless there is a clear reason to question eligibility, the final verification of eligible expenses rests with you on your individual tax return (IRS Forms 1040 and 2441), particularly if your return is ever audited by the IRS.
Navigating Complex Dependent Care FSA Situations
For more complex scenarios or nuanced situations regarding Dependent Care FSA eligibility, it’s advisable to seek professional tax advice. Understanding the rules and limitations, especially for married couples, is crucial to effectively utilize this valuable employee benefit.
Relevant Cites:
- IRC §129(a)(2)(A): https://www.law.cornell.edu/topn/internal_revenue_code_section_129
- IRC §129(b): https://www.law.cornell.edu/topn/internal_revenue_code_section_129
- IRC §129(d)(2): https://www.law.cornell.edu/topn/internal_revenue_code_section_129
- IRS Publication 503: https://www.irs.gov/pub/irs-pdf/p503.pdf
- IRS Form 2441 Instructions: https://www.irs.gov/pub/irs-pdf/i2441.pdf
Disclaimer: This article provides general information and should not be considered legal or tax advice. Consult with a qualified professional for personalized guidance.
