You've probably heard of Flexible Spending Accounts (FSA) for medical expenses, but what about for childcare or preschool? It could be an option for your family, but there's important things to keep in mind and check for benefits, your preschool of choice, and more.
What is an FSA
Flexible Spending Accounts (FSAs) are a type of account available in conjunction with certain health insurance plans. The idea is to use funds for expenses not directly covered by medical insurance. FSAs are offered in different types for specific uses so be sure to check what your employer is offering.
The types of FSAs
Health FSA-Can be used to pay for qualifying medical expenses.
Limited Purpose FSA-Can only be used for qualifying dental and vision expenses.
Dependent Care FSA-Can only be used for dependent care expenses like daycare, after school, or adult care. This is our focus when considering preschool expenses.
What is a dependent care FSA?
A dependent care FSA is a type of account you use to pay for certain expenses related to the care of a dependent (usually a child). If your employer offers this option and you opt in, deductions happen similarly to other work-related benefits. You choose an amount that will come out of every paycheck and go into an account. Later on, you request reimbursement for eligible expenses.
Why would you want to use an FSA for preschool?
FSAs, including dependent care FSAs, come with a tax advantage. Money put into the account is “pre-tax”. This means that the amount you allocate from each paycheck gets better tax treatment than the rest of your paycheck. In other words, using a dependent care FSA can result in some tax savings.
Do preschool expenses qualify for an FSA?
Generally yes, but there are requirements from the IRS you must meet.
- Do both parents work?
- What kind of program is it?
- Who offers the program?
Requirements to use dependent care Flexible Spending Account for preschool costs
Do both parents work?
To use a dependent care FSA, both Mom and Dad need to be working and need childcare in order to work. Actively “looking for work” can also qualify in some circumstances. If one parent is “available” to care for the child, then you would not be eligible.
What kind of program is it?
Most programs that are pre-kindergarten will qualify. If a program is more education than childcare, then the IRS takes issue with your eligibility for an FSA. If education is “incidental” to the childcare aspect of a program, then the IRS is fine with using FSAs for the program. Again, most preschools are eligible.
Who offers the program?
Generally, this will be a “licensed care facility.” Most preschools (including church preschools) require a license and fall in this category.
Before you choose to enroll and use an FSA for this purpose, there's a few things to know about FSAs as a whole.
The IRS has a limit on how much can go into an FSA each year.
Use it or lose it
FSA money must be used each year and cannot be rolled over to future years. Some employers do, however, have a limited amount that can be used at the beginning of the next calendar year.
Tied to your job
FSA money, unlike a 401k or HSA, is not portable. In other words if you leave that job you can’t take the FSA money with you.
No earning or growth
Money in FSA does not grow or earn any interest during the year.
Tied to yearly enrollment
Dependent care FSAs work just like your other work benefits. You have to enroll during you company’s annual enrollment window for benefits.
Using your FSA to pay preschool tuition or expenses
The options available will depend on the specific provider for your FSA. Check with the FSA provider or your HR department to see for sure. Some possibilities include:
Pay out of pocket and request reimbursement
This option is exactly what it sounds like. You pay the preschool via personal check or card. You then request reimbursement from the FSA which is typically offered via check or direct deposit to your checking account.
Some FSA providers offer a debit card option. Your preschool will need to accept this option so check ahead of time to see.
Some FSA providers will give you the option to provide the preschool’s information to pay them directly. This is sometimes offered as a one time or a recurring payment. Check with the preschool to make sure they can accept payments like this.
If you choose to enroll in a Dependent Care FSA, it is important to keep excellent documentation. In the context of preschool, keep all the bills and receipts from the preschool. You may have to present a copy for reimbursement. Some providers will let you submit a copy via an app. Separate from that, it's important to keep documentation in case the IRS questions whether your reimbursement is legitimate. Make it a habit to keep copies of documents from the preschool in the event of an audit or related situation.
If you want to learn more about how your preschool choice might or might not qualify for a dependent care FSA, you have a few options. First, your employer's FSA provider may have some information to help with your specific situation. You can also check IRS publication 503 for more information on how Uncle Sam views certain expenses like preschool.
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