What HR Needs to Know About Dependent Care FSAs

Executive overview

Rising childcare costs are pushing employees to seek tax-advantaged relief, and Dependent Care FSAs (DCFSAs) give HR a concrete tool to help. Employees contribute pre-tax dollars — up to $5,000 per household in 2025 — to cover qualifying dependent care expenses. The key HR value is bridging benefit awareness with IRS compliance, preventing over-contributions, failed non-discrimination tests, and forfeited funds. Managed well, DCFSAs improve morale, productivity, and retention; managed poorly, they create audit risk and erode trust.

How DCFSAs work

• Employees elect a contribution during open enrollment; funds are deducted from each paycheck on a rolling basis
• 2025 IRS contribution limits: $5,000 per household or $2,500 if married filing separately
• Unlike health FSAs, funds are only accessible as they accumulate — no upfront float
• Employees can hold both a dependent care FSA and a health FSA simultaneously; funds cannot be interchanged

Who qualifies

• Dependent children under age 13
• Dependents who are physically or mentally unable to self-care and live with the employee at least half the year
• A spouse incapable of self-care who resides with the employee for at least six months
• Employees with edge-case dependents should consult a tax advisor — IRS definitions are specific

Eligible and ineligible expenses

Eligible:

• Daycare, preschool, before/after school care
• Summer day camps
• In-home or out-of-home care for dependents unable to care for themselves

Not eligible (common misconceptions):

• School tuition
• Food costs
• Overnight camps
• Expenses not tied to enabling the employee to work or seek work

Compliance essentials

• Use-it-or-lose-it rule: unspent balances are forfeited at plan year end — encourage realistic contribution estimates during enrollment
• Non-discrimination testing: DCFSAs must not disproportionately benefit highly compensated employees; failure strips tax benefits from all participants
• Receipt retention: employees must document all claims; HR should communicate this requirement proactively

Mid-year contribution changes

Contributions are fixed after enrollment but can be adjusted following IRS-approved qualifying life events:

• Change in marital status (marriage, divorce, death of spouse)
• Change in number of dependents (birth, adoption, loss of dependent)
• Employment status change for employee, spouse, or dependent
• Dependent aging out of eligibility
• Relocation
• Change in cost of dependent care

Whether a change is permitted depends on the employer's specific plan document.

HR's administrative role

• Educate employees during open enrollment on eligible expenses and tax advantages
• Coordinate payroll deductions accurately
• Consider partnering with a third-party administrator (TPA) to automate deductions, manage compliance, and provide employee-facing guidance
• Integrated TPA solutions (e.g., Alpine via BerniePortal) can consolidate dependent care FSAs, health FSAs, and commuter benefits into a single HR workflow