Everything you need to know about Dependent Care Flexible Spending Accounts

Paying for dependent care is a source of stress for many employees and their families. A report from the Economic Policy Institute¹ found that childcare costs more than public college tuition in 38 states and more than rent in 17 states. The statistics are also eye-opening when it comes to elder care. According to an AARP report,² just over one-third of family caregivers say they have had to stop saving in order to pay for care, and 18% say it’s a significant financial strain for them.

Employers are on the forefront of helping their people find relief from rising care costs. One key tool? Dependent Care Flexible Spending Accounts (DCFSAs). This benefit allows employees to save pre-tax dollars for expenses like preschool, child or elder daycare, and more. In this article, we’ll break down the details of DCFSAs and explore how they can relieve the stress of dependent care costs for employees and their families.

What is a DCFSA?

A DCFSA is a pre-tax benefit account used to pay for eligible dependent care services. Employees can use these funds to pay for services like daycare, preschool, summer day camp, before or after school programs, and/or elder care.

It’s a convenient, tax-advantaged way to help employees save for care costs so that they can continue to work. Families can decide how much to contribute to their accounts (with annual federal limits in place) and have pre-tax funds automatically set aside during each pay period. Employers have flexibility in how they set up DCFSA accounts for employees, including waiting periods, employer contributions, and grace periods.

Who is a dependent?

Dependent Care Flexible Spending Accounts must be used for:

• Children under the age of 13.
• Children age 13 or older who are mentally or physically unable to care for themselves.
• A spouse who is mentally or physically unable to care for themselves.
• Parents or other adults you can claim as dependents on your tax return who are unable to care for themselves.

To be eligible, the dependent must reside with the employee for more than half the year, and the employee must provide more than half of their financial support. This includes both dependent children and older adults.

DCFSA eligible expenses

The Internal Revenue Service (IRS) decides which expenses can be covered with DCFSA funds. You can search HealthEquity’s eligible expenses list here, which will give you examples and explanations of what’s covered and what’s not.

Take a look at some common examples of eligible and ineligible expenses:

Please keep in mind that this list is not comprehensive; it shows some of the most common expenses, but employees should check with a tax professional when planning their DCFSA spending and reimbursement.

Employees pay for their dependent care expenses out of pocket, then submit receipts to their plan administrator. They can generally choose to get reimbursed by check or have the funds deposited directly from their DCFSA into their bank account.

A quick note: to utilize a DCFSA, employees (and their spouse if filing jointly) must have earned income during the year, meaning they are working or actively looking for work, as defined by the IRS. However, the spouse is considered to have earned income (for DCFSA purposes) if they are either a full-time student for at least five calendar months during the tax year, or they are physically or mentally incapable of self-care and lived with the employee for more than half the year.

Full-time caregivers, like stay-at-home parents, aren’t able to be paid for the work they do using DCFSA funds. For example, if an employee has a spouse who is a stay-at-home parent, they can’t use DCFSA funds to pay their spouse a salary. They would, however, be able to pay a nanny if their spouse is working, looking for work, or attending school.

DCFSA maximum yearly contribution limits

The IRS is responsible for determining annual contributions limits for DCFSAs. These can change each year, and sometimes they will be revised due to new legislation. Employers will want to keep up with these changes in order to satisfy IRS nondiscrimination tests.

Employees can contribute different amounts based on their tax filing status. For example, married couples filing separately can contribute half the annual limit of married couples filing jointly or individuals filing as the head of household.

The IRS also makes annual announcements about new contribution limits, which can also be affected by new legislation. For example, the 2025 One Big Beautiful Bill Act increased the contribution amounts for the 2026 tax year, which can help care givers keep up with increasing costs. You can see the latest contribution limits here.

Let’s look at an example. If an employee and their spouse are both eligible to contribute to a DCFSA, they cannot each contribute the maximum amount; that is the limit for the entire household. Similarly, eligible expenses cannot be reimbursed twice. For example, if an employee is reimbursed for funds used to pay for daycare, the couple can’t file a claim for the same payment from the spouse’s DCFSA.

Employers can also contribute to DCFSAs on behalf of employees as part of a robust benefits offering. When planning their yearly contributions, employees must also take into account how much their employer is contributing and not exceed the annual limit.

Maximum DCFSA contributions are also subject to rules based on the employee’s income:

• If single/head of household, the earned income limitation is the employee’s salary, excluding contributions to their DCFSA.
• If married, the earned income limitation is the lesser of the employee’s salary, excluding contributions to your DCFSA, or their spouse’s salary.

Note: Employers may choose a different limit for their plans, and they can also contribute to employee accounts.

How do DCFSAs compare to healthcare or Limited Purpose FSAs?

FSA stands for “flexible spending account,” and there are actually three types of these accounts: healthcare FSAs, Limited Purpose FSAs, and DCFSAs. All three accounts allow employees to make pre-tax contributions, but they are used for different purposes.

• Healthcare FSAs are to be used for eligible healthcare expenses, such as over-the-counter medications, diabetic supplies, chiropractic care, sleep aids, dental/vision costs, and more.
• Limited Purpose FSAs are more restricted than healthcare FSAs, and eligible expenses include dental exams, eye exams, and related supplies.

Healthcare FSAs are compatible with most types of health plans, but if employees contribute to this type of account, they are not eligible for a Health Savings Account. However, IRS rules do allow HSA account holders to also utilize LPFSAs and DCFSAs. It’s a smart way to maximize savings and be prepared for health, dental, vision, and dependent care costs.

Learn all about FSA options here.

Why DCFSA benefits are great for employers (and employees)

Besides the obvious tax savings, there are a number of reasons that dependent care benefits make good sense for both employees and employers. First, research shows that great benefits can lead to employee satisfaction. According to a 2025 MetLife study,³ employees who have positive experiences with their benefits are:

• 2.4X more likely to feel holistically healthy
• 1.9X more likely to trust that their organization is on their side
• 1.8X more likely to trust their employer’s leadership

DCFSA benefits are one key piece of an employee benefits program that can create positive experiences. If benefits professionals also focus on helping employees understand these benefits, it can even lead to better employee retention. HealthEquity’s research found that 97% of employees who are satisfied with the support they get to understand benefits say they’ll stay with their employer for at least 2 years.

It’s also worth mentioning financial wellness. As the cost of childcare outpaces inflation, families struggle to pay for daycare, after school programs, babysitters, and other expenses. For many employees, their entire salary might be eaten up by rising care costs. This could lead to a caregiver dropping out of the workforce entirely.

In fact, one report⁴ found that 50% of Millennial moms and 52% of Gen Z moms say they have considered quitting their jobs because the cost and stress of childcare outweigh their earnings. A robust DCFSA benefit can help parents boost their take-home pay and feel confident in their ability to pay for dependent care. Here’s a handy DCFSA overview guide to share with your employees as they navigate their DCFSA benefits.

DCFSAs are truly a win-win for employers and their people. Want to learn more about how benefits team can support caregivers with DCFSAs? Visit our employer guide to DCFSAs.