Should You Offer a DCFSA (Dependent Care Flexible Savings Account) to your Employees?

 

Article by: Elizabeth Ingram 
Vice President of People Strategy, Insurance Trust 

A DCFSA is an account that allows employees to pay for childcare (under age 13) expenses pretax.  As an employee, although they’ll need to provide invoices or proof of expenses to the DCFSA provider, there are tax savings.  Reimbursements cannot be made until after services have been performed, so if the daycare requires payments at the beginning of the week the employee cannot get reimbursed until the end of that week.  However, it’s a nice way to keep some extra funds in the employee’s pocket throughout the year, but that doesn’t mean it makes fiscal sense for the employer.

Generally, DCFSAs are administered by third parties (your broker can help you with this if you don’t have a relationship yet) which means there is a cost associated with this benefit.  An annual cost is typical, and some third parties have other fees as well.  But there are 2 easy ways to determine whether those fees are worth it.

  • If you aren’t worried about the expense ($500-$1000/year for a small business) and it makes your employees happy, it may pay for itself in happy, productive employees.
  • If you want a hard number comparison, gather your annual costs and take a few minutes to play around in your payroll system.  Payroll systems typically allow you to run what I call dummy paychecks through a paycheck calculator.  Run 2 calculations on each employee enrolled in the DCFSA; one with their current withdrawal and one without a DCFSA withdrawal.  Now, calculate the difference in the employer taxes and multiply it by the number of pay periods per year.  If the savings in employer taxes are more than the cost of your DCFSA administration, it’s saving you money.  Remember this may change from year to year.

Some benefits you offer may benefit the whole team, while others don’t.  But a willingness to consider employee-requested benefits shows you care.

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