It’s a common question for working married couples: can both spouses maximize contributions to their Dependent Care Flexible Spending Accounts (FSAs)? The short answer is generally no. While Dependent Care FSAs are a valuable tool for offsetting childcare costs, there are specific IRS rules that limit how married couples can utilize them. This article will delve into the key considerations for married couples regarding Dependent Care FSAs, ensuring you understand the contribution limits and eligibility requirements to make the most of this benefit.
$5,000 Combined Dependent Care FSA Contribution Limit for Married Couples
The primary point to understand is that the Internal Revenue Code §129 sets a combined annual contribution limit of $5,000 for married couples filing jointly. This isn’t a per-person limit; it’s a household limit. Therefore, if both you and your spouse have access to a Dependent Care FSA through your employers, you cannot each contribute the full $5,000. You must coordinate your elections to ensure your total combined contributions do not exceed this $5,000 threshold per calendar year.
For those married couples who file separately, the limit is $2,500 per spouse. It’s also important to note that your personal Dependent Care FSA benefit is further capped by the earned income of the lower-earning spouse. For instance, if one spouse earns only $1,000 annually, the maximum Dependent Care FSA benefit for the couple is limited to $1,000, regardless of the standard limits.
It’s worth mentioning that the American Rescue Plan Act (ARPA) temporarily increased the Dependent Care FSA limit to $10,500 (or $5,250 for married filing separately) for 2021 only. However, these limits have reverted back to the standard $5,000/$2,500 for subsequent years. Critically, the $5,000 limit is not adjusted for inflation and requires congressional action to be changed.
What Happens if Married Couples Exceed the Combined Limit?
Sometimes, due to a lack of awareness of this combined limit, both spouses might inadvertently elect to contribute the full $5,000 to their respective Dependent Care FSAs. When this situation arises, it’s crucial to understand the implications and potential corrective actions. Employees who realize they have over-contributed should address this issue promptly to avoid tax complications.
The “Work-Related Expense” Rule: Both Spouses Generally Need to Be Working
A fundamental requirement for Dependent Care FSA eligibility is that the expenses must be “employment-related.” This means the childcare costs must enable both the employee and their spouse to be gainfully employed. For married individuals, dependent care expenses are considered “employment-related” under the following circumstances:
- Both Spouses are Gainfully Employed: This is the most straightforward scenario. If both you and your spouse are working, your childcare expenses to allow you both to work are generally eligible.
- Spouse Actively Seeking Employment: If one spouse is unemployed but actively looking for work, childcare expenses incurred to allow the working spouse to work and the unemployed spouse to seek employment can qualify.
- Spouse is a Full-Time Student: A spouse attending school full-time is considered to be “working” for Dependent Care FSA purposes. This allows the working spouse to utilize the FSA for childcare.
- Spouse is Incapable of Self-Care: If a spouse is physically or mentally incapable of self-care, and resides with the employee for over half the year, they are also treated as “working.” This provision ensures that employees caring for a spouse with disabilities can access dependent care benefits.
Conversely, if one spouse is a stay-at-home parent and not working, looking for work, a full-time student, or incapable of self-care, then childcare expenses are generally not considered employment-related and are not eligible for Dependent Care FSA reimbursement.
Unfortunately, if an employee mistakenly enrolls in a Dependent Care FSA when their expenses are not employment-related, there is generally no IRS provision to retroactively undo the election based on a “mistake of fact.” While employers may allow employees to stop future contributions, the “use-it-or-lose-it” rule still applies, meaning any unspent funds at the end of the plan year (plus any grace period or run-out period) will be forfeited.
Dependent Care FSA and Full-Time Student Spouses
As mentioned, a spouse who is a full-time student is considered to be working for Dependent Care FSA purposes. To qualify as a full-time student, the spouse must be enrolled at a qualifying school for the number of hours or classes deemed full-time by the institution. This full-time status must be maintained for at least part of each of five calendar months during the year (months need not be consecutive). Eligible educational institutions include high schools, colleges, universities, and trade schools. However, on-the-job training, correspondence courses, and online-only schools generally do not qualify.
Because the Dependent Care FSA benefit is limited to the lower-earning spouse’s income, the IRS has a special rule for full-time students. A spouse in full-time education is deemed to have monthly earned income of at least $250 if there is one qualifying child, or at least $500 if there are two or more qualifying children.
Dependent Care FSA and Spouses Incapable of Self-Care
Similarly, a spouse who is physically or mentally incapable of self-care is also treated as working for Dependent Care FSA purposes. The definition of “incapable of self-care” is quite specific. It applies only if the individual, due to a physical or mental defect, cannot manage their hygiene or nutritional needs or requires constant attention for their own or others’ safety. The IRS clarifies this as applying to individuals unable to dress, clean, or feed themselves due to these conditions. Importantly, simply being unable to perform household tasks or care for children due to a condition does not automatically qualify a spouse as incapable of self-care for Dependent Care FSA purposes.
Like full-time students, a spouse incapable of self-care is also attributed a minimum monthly earned income of $250 (one qualifying child) or $500 (two or more qualifying children) for the purpose of calculating the Dependent Care FSA limit.
Dependent Care FSA and Parental Leave or Summer Break
It’s crucial to understand that if either spouse is on parental leave or taking an extended break like summer break (common for teachers), dependent care expenses incurred during this time are generally not eligible for FSA reimbursement. This is because during periods of leave or extended breaks, the childcare expenses are not enabling both spouses to be gainfully employed.
Dependent Care FSA and Self-Employed Spouses
Self-employment does qualify as gainful employment for Dependent Care FSA purposes. If one spouse is self-employed, childcare expenses can still be eligible if they allow both the employee and the self-employed spouse to work. However, the self-employed spouse must have actual earned income from their self-employment for the couple to benefit from the Dependent Care FSA, as the benefit is still limited by the lower-earning spouse’s income.
Determining if Dependent Care Expenses are Eligible
Ultimately, determining whether specific dependent care expenses are eligible for Dependent Care FSA reimbursement is the employee’s responsibility and is considered an individual income tax matter. If there is any doubt about the eligibility of expenses, it is always recommended that employees consult with a personal tax advisor.
When submitting a claim to the Dependent Care FSA administrator, employees are required to certify that the expenses are indeed eligible for reimbursement. While administrators typically do not conduct in-depth investigations into each claim unless there is a clear reason for doubt, the IRS can scrutinize expense eligibility during a tax audit. Employees are therefore responsible for accurately verifying the eligibility of their expenses when filing their tax returns (IRS Forms 1040 and 2441).
Navigating Complex Dependent Care FSA Eligibility Issues
Situations can arise where determining the eligibility of dependent care expenses is challenging. For further guidance on these complex scenarios, refer to additional resources on Dependent Care FSA eligibility.
In Conclusion
While both spouses in a married couple can participate in Dependent Care FSA programs offered by their respective employers, it’s critical to remember the combined $5,000 annual contribution limit. Furthermore, understanding the “work-related expense” rule and its exceptions is essential for ensuring expenses are eligible for reimbursement. Careful planning and coordination between spouses are key to maximizing the benefits of a Dependent Care FSA while staying compliant with IRS regulations. When in doubt, seeking professional tax advice is always recommended.
Relevant Legal References:
- IRC §129(a)(2)(A): Defines the general limitation for dependent care assistance exclusion.
- IRC §129(b): Outlines the earned income limitation for the exclusion.
- IRC §129(d)(2): Provides special rules for spouses who are students or incapable of self-care.
- IRS Publication 503: Offers guidance on child and dependent care expenses, including the “work-related” test.
- ABA JCEB Q/A (May 2007): Addresses scenarios of mistaken elections and provides IRS guidance.
- IRS Form 2441 Instructions: Instructions for claiming child and dependent care expenses on your tax return.
Disclaimer: This information is for general guidance only and not legal or tax advice. Consult with a qualified professional for personalized advice.
