Working 9 a.m. to 5 p.m. while parenting young children or taking care of elderly relatives is becoming increasingly difficult to juggle all at once as caregiving costs continue to rise. As an organization, you can help support your caregiving employees while boosting productivity by promoting dependent care flexible spending accounts (FSAs). This uses pretax dollars to provide a tax advantage method to pay for eligible caregiving expenses.
You could also make a bigger commitment, even if you are concerned about the costs. For example, if you provide childcare directly through a facility in your building, your organization could qualify for a significant tax credit.
When Employees Opt In
To sponsor dependent care FSAs, you’ll need to implement a dependent care assistance program (DCAP), which enables you to retain ownership of your workers’ FSAs. Participating employees must opt in, typically during your organization’s open enrollment period or after experiencing a qualifying life event. Then they make pretax compensation deferrals to their accounts, up to $7,500 annually for married couples filing jointly, single filers, and heads of households, $3,750 for those married and filing separately. These amounts aren’t indexed for inflation.
Workers can use their FSA balances to pay for eligible expenses, including day care, before- and after-school care, summer day camps, and care for dependent adults who can’t care for themselves. Qualifying expenses must enable participants (and, if applicable, their spouses) to work or seek employment. Using pretax dollars to fund accounts allows participants to pay for qualifying care while reducing their taxable incomes.
Employers Win, Too
For employers, sponsoring dependent care FSAs also offers potential advantages. First, these accounts can help attract strong job candidates and retain employees who are caregivers.
Second, because participants’ contributions occur pretax, they’re exempt from Social Security and Medicare taxes. That reduces your organization’s (and your employees’) payroll tax burden. To increase dependent care FSA participation, you may make contributions to employees’ accounts. However, the $7,500/$3,750 annual contribution limits apply to combined employer-employee contributions. Note that you can’t deduct contributions as a business expense.
You’ll need to confirm that your DCAP complies with IRS regulations, including nondiscrimination rules. Proper recordkeeping, timely reimbursements, and clear communication are also critical. Be sure to educate participants about the “use-it-or-lose-it” rule that says FSA balances generally must be spent by the end of the year. (Unused account funds generally revert to employers). Be sure to train employees to estimate expenses and submit claims to decrease the risk of losing FSA funds. And let participants know their FSAs aren’t portable — meaning they can’t take their balances with them if they leave your organization.
Tax Help With Costs
Another way to retain loyal, hardworking staff is to provide child care directly. For 2026, you may be able to claim an employer-provided child care tax credit equal to 40% of your qualified expenses for providing child care to employees, plus 10% of qualified resource and referral expenditures, up to $500,000. For eligible small businesses, these amounts are 50% and up to $600,000, respectively. The maximum dollar amount will be adjusted annually for inflation after 2026. (The additional 10% credit for resource and referral expenses will continue to be available).
Qualified costs include those spent to acquire, construct, renovate, and operate a child care facility. Or you can claim expenses for contracting with a licensed child care facility. If you provide on-site care, at least 30% of the enrolled children must be your employees’ dependents.
Competitive Package
Dependent care FSAs and employer-offered child care can be competitive additions to your employee benefits package. But because of the resources involved, think carefully before designing a DCAP or establishing a child care facility. Your workforce may not want them. Consider distributing a survey to gauge interest before you commit to offering new fringe benefits.
And to help ensure you’re offering the most cost- and tax-effective benefits to your workforce, contact us. We can review your benefits lineup, potentially suggest changes, and advise on program setup and administration.
