Dependent Care Flexible Savings Accounts (FSA) allow individuals to keep a portion of their tax-free earnings to pay for dependent care expenses. The Internal Revenue Service allows families to set aside up to $5,000 per year to pay for expenses like daycare or home health care for dependent children or elderly/disabled adults. The $5,000 per year maximum is per family, not per person; a married couple could not jointly contribute $10,000 to their FSA.
FSAs help families save money by taking contributions to these accounts out a person’s paycheck before taxes are assessed. By using pre-taxed income for reimbursement, parents can save between $1,000-$2,000 each year at tax time.
FSAs reimburse parents for qualified dependent care expenses. In order to qualify as a dependent care expense, the money in the FSA must be used to care for a dependent under the age of 13 or a spouse or other dependent that is physically or mentally incapable of caring for him or herself. The FSA will only reimburse the account owner for expenses if the dependent resides with that person for more than half the year and that person can be claimed as a dependent on his or her taxes.
After a divorce, access to a family’s FSA may change. It is important to understand the rules of your FSA prior to your divorce to avoid unwelcome surprises.
First, note that the rules for reimbursement are different for divorced couples. If you are divorced and are the custodial parent, your child will be a qualifying individual under the FSA even if you cannot claim the child as your dependent for tax purposes. For instance, some couples may give the child tax credits or exemptions to the non-custodial parent, or the parents may switch claiming the exemptions each year. For FSAs, what matters is which parent has primary custody. A divorced, non-custodial parent cannot be reimbursed under the dependent care FSA, even if that person claims the children as a dependent for tax purposes.
Next, in order to use an FSA account, the expenses for child care (or in-home care for an elderly or disabled dependent) must be “work related.” This means that the care must directly enable the FSA account holder to work.
For example, suppose a husband’s employer provides an FSA account. If the husband and wife have children and both work outside the home, it is likely that the couple will need to pay for childcare in order to work. An FSA account would be the perfect way to subsidize this expense.
However, suppose the wife does not work outside the home. In this case, the expense of childcare would not be necessary to allow the husband to work, because the wife is able to care for the children herself. In that situation, the expense would not be work related and the husband would not be eligible to seek reimbursement for childcare expenses from his FSA.
After a divorce, the non-custodial parent will no longer be eligible for reimbursement from the FSA account. He or she will need to pay for these expenses out-of-pocket, and may need to budget accordingly. These types of expenses must be taken into account when working out the child support agreement.
At Ashby Law, our attorneys understand how divorce may affect a dependent care FSA, and will work with you and your spouse to create a child support arrangement and parenting plan that ensures your children’s financial stability. If you are planning to get divorced, call 509-572-3700 today to schedule an appointment at Ashby Law and learn more about your legal options.