Dependent Care FSA Rules | Non-Working Spouses, Expenses

It pays to learn the Dependent Care Flexible Spending Account (FSA) rules if you have a spouse not working or your child participates in programs that test the boundaries of IRS eligibility.

A family using an FSA to cover qualifying expenses can save thousands of dollars every year with little downside.

First, pretax payroll contributions lower your federal and state income taxes and reduce FICA obligations. Savings can exceed the alternative: Childcare Tax Credit.

Second, qualifying childcare costs typically exceed contribution limits by a wide margin, meaning the use-it-or-lose-it rule has no teeth.

Dependent Care FSA Spouse not Working

You may be eligible to claim Dependent Care Flexible Spending Account expenses even if your spouse is not working. Three IRS rules determine who does and does not qualify for reimbursement. [1]

  1. Job-related: The spending must enable you and your spouse to work or look for a new job
  2. Earned income: Your partner must make money through employment during the year to exceed your contribution
  3. Specific exemption: certain parents automatically meet the earned income requirement

One Spouse Disabled

You can also use a Dependent Care FSA when only one parent is working, when one spouse is physically or mentally incapable of self-care, and sometimes when your partner is disabled.

  • “Incapable of self-care” could mean the person cannot perform one or more activities of daily living. If so, the IRS imputes earned income for the individual during the period of incapacity
  • “Disabled” means the person is physically or mentally incapable of performing regular job duties. If so, the IRS counts taxable disability benefits as earned income during the period of incapacity

Stay-at-Home Mothers

In general, you cannot file Dependent Care FSA claims for stay-at-home moms because they do not incur work-related expenses. You would have to pay taxes on your contributions if one spouse is a homemaker for the entire year.

However, stay-at-home mothers could be DCFSA eligible if they work part-time or look for a job and accumulate enough earned income to exceed the annual contribution (no more than $5,000).

One Spouse Unemployed

Both parents do not have to work to be Dependent Care FSA eligible if one becomes unemployed. The jobless spouse has to meet two IRS rules.

  1. The unemployed parent looks for a new job
  2. Their annual earned income exceeds the claimed expenses

Bear in mind that unemployment benefits do not count as earned income. Therefore the jobless spouse will have to make enough money through employment during the year to exceed your annual contribution (no more than $5,000).

Full-Time Students

You can qualify for Dependent Care FSA reimbursement when only one parent is working when the other is a full-time student attending classes at an authorized school. IRS rules define when they impute earned income during the month.

  • Full-time definition: enrolled in classes for at least five calendar months, with enough credit hours to exceed the school-defined part-time definition
  • Authorized intuitions: high schools, colleges, universities, plus technical, trades, and mechanical schools
  • Unauthorized institutions: correspondence classes and internet-based online learning programs

Dependent Care FSA Eligible Expenses

Dependent Care Flexible Spending Account eligible expenses are more expansive than many parents realize and narrower than others hope. Below are the basic rules, followed by our interpretation as they relate to standard service providers.

  • The expenses must enable you and your spouse to work or look for a new job
  • Services must be for the physical care of the child, not for education, meals, etc.

Daycare and after-school care programs fit the criteria, but other services often fall into a gray area.

Nanny

Parents can use their Dependent Care FSA to cover nanny expenses, provided they care for young children in the home so that both parents can work. In these cases, nannies meet the essential qualifying criteria, and charges easily exceed the $5,000 limit.

However, keep in mind that by claiming an at-home nanny, you then become a household employer. You will need an employer identification number (EIN), and you may have to pay employment taxes.

Babysitter

The typical babysitter expenses rarely qualify for Dependent Care FSA reimbursement. Many parents hire babysitters to watch over a youngster at their home for non-work-related activities.

  • Go out to eat at a restaurant
  • Watch a movie at the theater
  • Attend a party or other social function

However, at-home babysitter costs become eligible when the care enables one or both parents to pursue a work-related task. For example, a babysitter watches your child while one working parent sleeps and the other is at their job.

Keep dated receipts for any of these activities.

Preschool

You can use your Dependent Care FSA to pay for preschool because IRS rules state that a child’s formal education begins when entering kindergarten. Even though preschool includes learning and instruction, the IRS classifies the tuition expenses as daycare.

Therefore, preschool is DCFSA eligible.

Kindergarten

You cannot use your Dependent Care FSA to pay for kindergarten expenses because IRS rules classify this grade level as educational. Plus, any snacks or lunches served are meals that do not qualify.

In other words, kindergarten is not childcare that enables both parents to work. The primary role of the kindergarten teacher is to begin the education process.

Private School

You cannot use Dependent Care FSA funds to pay for private school tuition because IRS rules disqualify education expenses. Therefore, parents do not get any tax breaks when sending their kids to private schools for any of these grade levels.

  • Kindergarten
  • Elementary (1–6)
  • Middle (7-8)
  • High (9-12)

Of course, private preschools and daycare centers do qualify for DCFSA reimbursement as they do not fall into the educational category.

Summer Camp

You can use your Dependent Care FSA to pay certain summer camp expenses, provided the program enables both parents to work or look for a new job.  IRS rules dictate when you can claim these charges.

  • Overnight or sleepover summer camp is not work-related, and these costs are ineligible for reimbursement
  • Summer day camps do qualify even if they specialize in special activities such as computers or sports such as soccer, basketball, baseball, etc.

Virtual Camp

It is not clear that you can use a Dependent Care FSA to pay for virtual camp expenses as internet-based activities may not enable both parents to work. At least one has to stay at home to supervise in between sessions.

The Covid-19 pandemic fostered an explosion of virtual camp experiences. However, IRS rules were slow to respond, and an existing precedent made eligibility uncertain.

For instance, internet-based online learning programs do not qualify parents as full-time students (see above). Therefore, virtual camp may suffer the same fate, and your administrator may deny claims.


Article Citations

[1] IRS Publication 503