Daycare Flex Spending Account

[shellbell516]

We have open enrollment this week for our benefits with work. I'm trying to decide what to do with the Daycare Flex Spending account. I can contribute a max of $5000/yr, which would start Jan 2006.

I'm still confused how all this works. I know that it would be a max of $416/mo that would come out of my paycheck. I know that the money has to be in that account before reimbursement starts. So, in Jan I pay daycare out of my check, plus I pay the $416 to the flex account. At the end of the month, I send in my daycare receipts and get reimbursed $416. I can use this to go towards the Feb daycare costs and the cycle continues. Am I understanding this correctly?

Does everyone do this that has the option?

Do you max out the amount per month?

Does it really help save money?

Any other insights that would be helpful to know?

[paiger]

hey girlie ~ if it works the same as the medical spending accounts that we have, you will have to use ALL of it by the end of the year (or you lose it).

So, you calculate up the cost of your daycare and any other approved purchases that are covered under the plan, then the total for the year is divided by 12 and that comes out of your paycheck PRE-tax. Since, it is Pre-Tax, you are basically saving the amount of state and Fed withholding as well as decreasing the amount taxable income.

I have the Medical Flex account w/ our work, and it is nice. I don't even know that the money comes out of my account, and it is so nice to not have to pay out of pocket for my scripts and copays.

You also can use it before you actually put the money in the account. Meaning, if your daycare payment is due in January, then even though you haven't put in the whole amount, you can still use it. Then, if for some reason you left your job, you'd have to pay it back, but I don't think you would so that doesn't really matter.

[paiger]

So, in Jan I pay daycare out of my check, plus I pay the $416 to the flex account. At the end of the month, I send in my daycare receipts and get reimbursed $416. I can use this to go towards the Feb daycare costs and the cycle continues. Am I understanding this correctly?

Are you not going to get the debit card that the Med Flex Account has? That might make it not as good of a deal if you couldn't afford to have that come out of your account to wait for reimbursement. I wasn't going to do the MFA until I found out about the debit card, b/c it wasn't worth having the money taken out of my check then having to wait for the reimbursement. You should ask and see if they do they debit card thing.

[shellbell516]

Paige - I thought about the medical spending account, but I really don't spend too much each year for medical things. My Rxs usually cost me less than $50/yr. Our copay is $10/dr visit and I know Rachel will have at least 3 next year without counting sick visits. Do you really think it's worth it to do this as well if you expect to only spend $100/yr on medical stuff? Like you said, if you don't use it, you lose it.

[shellbell516]

Paige - I've been told that they don't do the debit card thing for the daycare account, only for the medical.

[Ohana]

I did the reimbursement account last year, and kicked myself nearly senseless when I realized I forgot to enroll for this year. You better bet I'm enrolling when our open enrollment starts next week!

For me, it worked like this: The reimbursement funds were taken directly from my paycheck (pre-tax). The daycare also took their tuition directly out of my paycheck. So the first couple of paychecks were a bit small. At the end of each month, I got a receipt from the daycare. I filled out the reimbursement paperwork online and faxed over the receipt. Within a few days, the money hit account.

I filled out the paperwork monthly (but I could have done it every paycheck, it was just too much of a PITA), and only requested that I be reimbursed what I knew was in my account. I asked for more once (because I miscalculated the account balance), and it got too confusing for me to understand what was going on, though they did give me the money. It just made subsequent claims a bit weird.

The savings, for me, were that I paid less in income tax, because $5K of my income wasn't taxed. It was definitely worth it!

[pixiecat]

Hi!
I'm a benefits administrator & think I can help you with this :)

First, you estimate your day care costs for the year. Most people have more than $5K of costs, so they elect the max, but make sure that you do NOT overestimate b/c you can only reduce your election if you experience well-defined "qualifying events." So only elect what you think you will need, as it is "use it or lose it."

Your employer will take out $416/month (or 208 if you are paid twice per month) and it will accumulate in your account. You can only be reimbursed for money that is already in your account (this is different from the health care account). So if you sumbit a $500 claim for January, you will only rec'v $416, and then will get the balance when your employer takes out the next contribution.
Does everyone do this that has the option?

I would reccommend that most people definitely do this as it is a big tax savings! (Although you can only do this OR take the tax credit on your taxes, so you should investigate which is better in your personal situation)

Do you max out the amount per month?

Only if you know that you will have at least $5K of expenses for the year.

Does it really help save money?

Yes, a ton! Imagine the taxes you would have to pay on $5K... it is a great benefit. But you do have to be conciencious about submitting your claims. You can submit them monthly, quarterly, end of the year, whatever works for you, but you have to submit them before the end of the grace period (usually 90 days after the "plan year" closes).

One last thing... you have to make sure that your nanny or day care provider is "above the board" and pays taxes on the money that pay them! Your contributions are reported to the IRS & you have to give them the tax ID number or the social security number (if it is a private nanny).

Definitely check out this website for all the ins and outs, but I do recommend the Flex Savings acct for day care :)
http://www.irs.gov/pub/irs-pdf/p503.pdf

[LeighW]

I contribute to a childcare flexible spending account. I contribute the maximum amount--$5,000 per year.

Yes, there is a lag time, but it will only be for the first month--January 2006 for you. After that, you will always receive your reimbursement for what was withheld during the previous month. You will make up for the one month lag when you stop contributing. The month after your last contribution, you will still receive your reimbursements from the withholdings during the previous month.

Unlike a medical flex account, they will not send you $$ until you have actually contributed it.

Here's how it works:

In January, you will have $416.67 withheld from your paychecks if you are contributing the maximum amount. You will pay your daycare bill for that month and get a receipt. You will submit that receipt to whomever administers your flexible spending account (I have to wait and submit mine during the last week of the month). You will start receiving reimbursement checks in February (mine are transferred directly to my checking account twice a month, one after each payday). The reimbursement amount is approximately $192 every two weeks, or $384 per month.

So, you will be receiving $384 per month of your $416.67 contribution. Medicare taxes are withheld, but not your regular income taxes. Depending on your normal tax bracket, this is a substantial savings. For example, if you are in the 28% bracket, you would normally pay $116 in taxes on the $416. Here, you are only paying $32 in Medicare taxes. (This is all approximate, your effective tax rate is probably less, because of exemptions and deductions, but I'm just trying to give you a general idea.)

It is a good deal.

HTH.

[shellbell516]

Thanks so far. This is all helping out a ton. I guess it would be best for me to max out the amount/mo.

LeighW- Thanks for giving me dollar amounts. That really helps me see how it works. I didn't realize that medicare would be taken out on it as well. But I see that it does help in the long run.

pixiecat - We use a regular daycare center, so I'm sure they're reporting their income. I checked out the website. Thanks.

Ohana - Thanks for your input. It really helps.

[RileyMom]

I have the flexible spending account too. Mine is set up similar to everyone else, except I do not deal with receipts or forms, nor do I deal with getting a check in the mail to deposit. :) Here's what I do.

1. At the beginning of the enrollment period (April) I fill out ONE claim form for the entire year for the full $5k. I bring it to my Daycare, and have them sign off on it.

2. I fax the form to the company who my employers has chosen to handle our flexible spending account

3. Every two weeks my employer deducts a set amount out of my paycheck and forwards that amount to the company handling the account.

4. Once the company receives the check from my employer they electronically re-deposit that money right back into my checking account. I LOVE IT. I used to get sent a check in the mail and have to re-deposit it in my account, but it was a pain.

No receipts, no claim forms, no checks. I don't have to do anything all year long. Its GREAT! And it really is a tremendous savings. My only complaint is that I wish we could deduct more than $5k, because that is a drop in the bucket compared to what most people pay for daycare. But at least it is something. :)

[wildcat]

Another question - can I contribute $5k per year and then my DH contribute another $5k, or is the max $5k for the both of us? TIA!

[shellbell516]

RileyMom - your system sounds great, but I think our is the one where you have to submit the receipts each month.

[RileyMom]

Another question - can I contribute $5k per year and then my DH contribute another $5k, or is the max $5k for the both of us? TIA!

Unfortuantely, 5k is the max per household. :(

[LTJC]

LOVE the Flex Spending Account. Our daycare costs exceed $16,000/year, so this was a no brainer for us. I fill out a form monthly and request reimbursement. After four months of filling out the form, I have requested all of the 5K. Reimbursement is automatically deposited into my checking account every other week throughout the year. It's so simple!

[allyray231]

wow I was just looking this up since my open enrollment begins soon

Question though-what if your daycare provider doesn't pay taxes on this money-I have a private nanny that I pay in cash

[Ohana]

Ally, I hate to say, but if you're paying with cash, you're probably not eligible for reimbursement.

[LeighW]

Allyson,

You will have to provide her social security number in order to set up the account, which I doubt she will provide if you are paying her under the table.

You will both be in trouble if you provide her social security number and the IRS learns you aren't withholding (FICA taxes, etc.) and she is not reporting her income.

[dionysia]

You also can use it before you actually put the money in the account.Not so with the Dependent Care FSA, only with the Health Care FSA.

ETA: Oops! Pixiecat already went over that! :o

Di

[almostthere]

I pay my nanny above board and use the flex account, I do have to pay some taxes and other stuff, but we both wanted it that way. Overall it does not end up saving me that much by the time I pay her taxes, but still saves some.

It is something to remember that your first few paychecks will be less and you will have to wait to recieve the money back - however it is a great savings overall.

[allyray231]

yeah that is what I thought-ah well!

[jojobear]

I know everyone is in a different tax situation and sometime it's hard to give advice...but I thought in general childcare FSA was better.

This came out on Yahoo. (http://finance.yahoo.com/taxes/article/102380/The_13_Most_Overlooked_Tax_Deductions)

Has it changed on what is better now????

---------

8. Child-care credit. A credit is so much better than a deduction: It reduces your tax bill dollar for dollar. So missing one is even more painful than missing a deduction that simply reduces the amount of income that's subject to tax.

But it's easy to overlook the child-care credit if you pay your child-care bills through a reimbursement account at work. Until a few years ago, the child-care credit applied to no more than $4,800 of qualifying expenses. And, the law allows you to run up to $5,000 of such expenses through a tax-favored reimbursement account at work.

Now, however, up to $6,000 can qualify for the credit...but the old $5,000 limit still applies to reimbursement accounts. So, if you run the maximum $5,000 through a plan at work, but spend more for work-related child care, you can claim the credit on up to an extra $1,000. That would cut your tax bill by at least $200.

[jh124]

bump - because this is a great program and (I think) you can enroll mid-year when your baby is born.

[Bernie & Matt]

I know everyone is in a different tax situation and sometime it's hard to give advice...but I thought in general childcare FSA was better.

This came out on Yahoo. (http://finance.yahoo.com/taxes/artic...Tax_Deductions)

Has it changed on what is better now????

---------

8. Child-care credit. A credit is so much better than a deduction: It reduces your tax bill dollar for dollar. So missing one is even more painful than missing a deduction that simply reduces the amount of income that's subject to tax.

But it's easy to overlook the child-care credit if you pay your child-care bills through a reimbursement account at work. Until a few years ago, the child-care credit applied to no more than $4,800 of qualifying expenses. And, the law allows you to run up to $5,000 of such expenses through a tax-favored reimbursement account at work.

Now, however, up to $6,000 can qualify for the credit...but the old $5,000 limit still applies to reimbursement accounts. So, if you run the maximum $5,000 through a plan at work, but spend more for work-related child care, you can claim the credit on up to an extra $1,000. That would cut your tax bill by at least $200.

I'd love to know the answer to this one too. I posted a similar question in the tax thread under money, but never got an answer.

[jojobear]

I haven't "found" an answer yet. Was going to ask the tax person we used this year...but didn't get the chance since I had already signed up for this year and it didn't matter anymore.

But, it would be good to know for next year... I've been sending in the reimbursements (online) and the system works ok, but it's just a little bit of a pain to remember to file a claim, scan the paperwork, email the info, wait for the check, and then get my butt to the bank to deposit the check. So, if the tax credit is better, that'll free up a little time.

[SiValleySteph]

I think it's relatively simple to determine whether the FSA or the child care credit is better for your situation by going through the IRS guidelines and looking at your income.

For one child (my situation), we would save $600 by using the credit. That is $3000 * 20% for AGI over $43k. Using the FSA, we deduct $5000 from our income and since we pay about 30% in taxes (something like that), that would save us $1500. Hence, FSA is better for us.

With two kids, you can claim $6k for the credit. 20% of that is $1200. For us, it would still be better to do the $5k FSA and then get your additional $200 from the 20% of that extra $1000 in the credit.

Hope that helps!

Here are my refrences:
Claiming the Child and Dependent Care Credit (http://www.irs.gov/newsroom/article/0,,id=106189,00.html)

Publication 503 Child and Dependent Care Expenses (http://www.irs.gov/pub/irs-pdf/p503.pdf)