As we embark on a new year, DBS is focused on a compelling resolution that goes beyond the typical personal goals. In 2024, we are committed to championing a cause that directly impacts the well-being of employees and families…an increase to the dependent care flexible spending account (DCFSA) cap. Recognizing the fluid dynamics of employee benefits, we believe that collaboration with federal lawmakers is essential to address the changing needs of the workforce.
Background
The Internal Revenue Code includes tax breaks that help pay for the expenses of caring for children and other dependents. To leverage this benefit for employees, employers can choose to offer DCFSA plans to their employees. With a DCFSA, an employee saves money by not paying taxes on dependent care expenses that he/she incurred.
Employees are allowed to elect a portion of their pay and credit it to a DCFSA, which reduces their tax liability because the amount of pay credited to the account is not taxed. Amounts credited to the employee’s DCFSA account can then be used by the employee to pay for expenses incurred for caring for an eligible dependent. The employee does not pay income or payroll taxes on those amounts.
There is an annual limit of $5,000 on the amount that can be credited to an employee’s DCFSA. That means any employee with child/dependent care costs exceeding $5,000 do not receive any DCFSA tax benefits due to the $5,000 cap. The American Rescue Plan (Public Law 117-2) temporarily increased the DCFSA contribution limit to $10,500 during the pandemic, but it has since lapsed back to the original amount.
Current Economics
Child care in the United States can be a shocking financial burden. Most families, who make the median income, cannot send their infant or toddler to daycare; not because they don’t want to, but because child care costs have risen substantially. Did you know…?
- The average national cost of child care was $14,760 in 2023.
- Child care costs have increased by 220% since 1990.
- Infant care exceeds the in-state tuition at public universities in most (34) states and Washington, DC.
- Families (especially those with kids under 5) often decide to leave their jobs because child care is out of reach.
Pending Legislation
The Improving Child Care for Working Families Act – which has been introduced in every Congress since 2017 – would increase the limitation on the exclusion from employee gross income for employer-paid dependent care assistance from $5,000 to $10,500.
Others proposals:
HR 478 – Working Families Childcare Access Act This bill increases to $15,000 the maximum amount of dependent care benefits excludible from employee gross income.
HR 4571 – Child Care Investment Act This bill increases the pre-tax deduction for DCFSAs from $5,000 to $10,000, and includes an additional $2,000 for each eligible dependent.
HR 5036 – Family Savings for Kids and Seniors Act This bill would nearly triple the amount families could set aside pre-tax for dependent care to $13,919.
Over the years, the fixed cap on the DCFSA has remained stagnant, save for the temporary adjustment during the pandemic. This lack of change has diminished its utility for employees over the decades. By revising/updating the limit on the DCFSA, we aim to offer more families a valuable tax advantage, providing essential financial relief and flexibility in child care spending.
As we observe policymakers turning their attention to child care issues post-pandemic, DBS – working alongside our industry’s trade association, the Employers Council on Flexible Compensation – would be honored to serve as a resource for Congressional members and their staffs on this matter and other employee benefit issues. Whether through comment letters, analysis of service offering information/statistics or expert testimony…we are here to assist.
Together – let’s make 2024 a year of meaningful change!
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ICYMI – in the midst of all of the holiday hustle and bustle, the IRS released the 2024 standard mileage rates used to calculate the deductible costs of operating an automobile for business, charitable, medical and moving purposes. As of January 1st, the standard mileage rates for the use of a motor vehicle (i.e. car, pickup truck, van) for medical purposes will be $0.21 cents/mile…a decrease of $0.01 cent from 2023.