Employers' Pensions and Benefits Administration Manual (EPBAM)



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Tax$ave: Dependent Care Spending Account

What DCSA Does

An employee who has to pay for care for dependents in order to work may want to take advantage of the Dependent Care Spending Account (DCSA) plan. Money contributed to a DCSA is free from federal income, Social Security, and Medicare taxes and remains tax-free when it is received. These contributions may also reduce the member's federal tax liability for the year in which they are deducted. 

How Much May Be Deducted

The plan allows a member to set aside up to $5,000 of salary before taxes each calendar year to pay for qualified dependent care expenses. The member then files claims for reimbursement of eligible expenses. When a claim is filed, the member cannot be fully reimbursed until the payroll deductions to date are at least equal to the amount of the claim.

Who Are Eligible Dependents

Eligible dependents include an employee's children under age thirteen, the employee's nonworking spouse, civil service partner, or eligilbe same-sex domestic partner if physically or mentally incapable of self-care, and any other person considered a dependent for tax purposes who is incapable of self-care and who normally spends at least eight hours each day in the employee's home.

Types of Services Eligible for Reimbursement

The types of services eligible for reimbursement include a qualified day care center, nursery school, or summer day camp (not overnight camping); a baby-sitter, if needed to allow the employee to work; a housekeeper whose duties include day care; and someone who cares for an elderly or incapacitated dependent.  For a complete list of dependent care expenses, see IRS Publication #503, Child and Dependent Care Expenses.

DCSA Compared to Federal Tax Credit

A member can use the federal tax credit instead of the DCSA. Generally, if a member's adjusted gross income is more than $24,000 a year, using the DCSA will result in greater savings. It is important to remember that any payment received from the DCSA will reduce dollar-for-dollar the amount that can be considered for tax credit and vice versa. Each employee must decide which method would work better based on income and personal tax status.

Very Important Note:

Under the DCSA, any unused contributions remaining in an account at the end of the calendar year are forfeited. Members have until March 31 of the following year, three months after the close of the calendar year, to file for eligible reimbursement.

Social Security Implications

Since payments to a Flexible Spending Account (DCSA or UMSA) and POP lower annual earnings against which Social Security deductions or employer contributions are made, there is a valid concern that participation in these plans would result in reduced Social Security benefits at retirement.

If a person were born after 1928, the Social Security benefits are calculated using a 35-year average of earnings. A reduction of $2,000 a year or even $5,000 a year over some portion of this 35-year span would have little effect on the average salary and, therefore, minimal impact on the Social Security benefits. 

To illustrate possible Social Security implications, the Social Security Administration has provided the Division of Pensions and Benefits with the example of an employee who retired in 1998 at age 65, whose wages had been at the maximum wages subject to Social Security deductions. Upon retirement, this individual's monthly Social Security allowance was $1,343. If that same person had been contributing $2,000 a year for the last 10 years to an FSA, the subsequent reduction in Social Security wages would have produced a monthly Social Security allowance of $1,335, a difference of less than $10 per month.

Fact Sheet #44, Tax$ave, and the annual Tax$ave Open Enrollment newsletter provide additional information about the UMSA and the DCSA.

Additional information about Flexible Spending Accounts
















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Last Updated: March 8, 2007