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Final Dependent Care FSA Rules Issued

August 22, 2007
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Final Internal Revenue Service regulations published Tuesday, August 21, update and clarify expenses that employees can pay through dependent care flexible spending accounts.

The final regulations, which take effect immediately and largely affirm rules the IRS issued in May 2006, provide numerous examples of expenses that may and may not be funded through a dependent care FSA.

For example, expenses for day camps, including specialized camps, are eligible for reimbursement. Additionally, preschool expenses, including food, can be reimbursed through an FSA.

On the other hand, expenses for kindergarten and higher grades are not eligible because those programs are primarily for education rather than for child care—part of the regulations that affirm an earlier IRS information letter.

The final regulations also say fees paid to an employment agency to obtain the services of an au pair can be covered through an FSA, as can the cost of bus service that delivers a child to a daycare facility.

However, the employee’s cost of driving his or her child to the facility is not reimbursable through an FSA.

Only a small percentage of employees are eligible to make contributions to dependent care FSAs because of federal restrictions. For example, in the case of employees’ children, FSAs can be used to cover eligible expenses for children only under age 13.

In addition, dependent care expenses related to children in two-parent families in which only one parent works cannot be covered.

Lower-income employees may find it more effective to take the federal dependent care tax credit than make pretax contributions to a dependent care FSA.

While only a small percentage of employees contribute to dependent care FSAs, those who do cut the true cost of such expenses by as much as one-third because they are paying with pretax contributions.

Filed by Jerry Geisel of Business Insurance, a sister publication of Workforce Management. To comment, e-mail editors@workforce.com.

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