Dependent Care Benefits: Valuable but Threatened?

In his State of the Union address, President Barack Obama promised to “streamline child care tax incentives” to help 5.1 million families. But his proposal could jeopardize dependent care savings accounts, a benefit valued by millions.

Around the same time as the State of the Union address, the U.S. Bureau of Labor Statistics released a report on employer-provided dependent care benefits. It looked at dependent care reimbursement accounts and workplace-funded childcare. According to the BLS, about 13 million American families with one or both parents working had children under 6 years old.

No law requires employers to provide dependent care benefits (which includes benefits for elder care). Yet many employers opt to provide these benefits, knowing they help their recruitment and retention efforts, ease work-family conflicts, reduce tardiness and absenteeism in the workplace, and increase employee morale and productivity. In 2014, 36 percent of private industry workers had access to dependent care reimbursement accounts, while 10 percent had access to workplace-funded childcare.

Dependent care reimbursement accounts also have tax benefits. They allow employees to deposit some of their pretax salary to a flexible spending account (FSA), which they can use to pay for dependent care while they work or look for work. The IRS considers expenses to care for children up to age 13 eligible dependent care expenses, along with care for adults and elders who cannot care for themselves. Eligible expenses include daycare, babysitters, before- and after-school programs and summer camps (not overnight). Employees must use the funds for expenses they incur within that calendar year. Employees can contribute up to $5,000 per year. High-wage workers are more likely to have these benefits. The BLS found that 58 percent of management, professional and related workers in private industry had access to dependent care reimbursement accounts. Only 18 percent of service and part-time workers had access.

Employees may be able to exclude workplace-funded childcare benefits from their taxable income. Employees who receive dependent care benefits from their employer might have a lower dollar limit on the amount of tax credit they can take.

The Obama administration wants to eliminate dependent care spending accounts. Instead, it would increase the dependent care tax credit. The credit currently allows taxpayers to use up to $3,000 in expenses for one child and $6,000 for more than one to figure the credit. The percentage of these expenses you can claim as a tax credit varies with your adjusted gross income, but you can get a credit of up to $1,000 per qualifying child.

Dependent care reimbursement accounts offer some advantages to employers that increasing the tax credit doesn’t. Offering these benefits can help employers recruit and retain younger employees with families, or those with eldercare responsibilities. Employers also reduce their payroll tax burdens, since employees contribute pre-tax dollars.