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Pay for Daycare with "Pre-Tax" Dollars
A DCRA plan provides a means for participants to set aside "pre-tax" dollars from their salary to pay for qualifying child and dependent-care expenses. Depending on your tax bracket, you will typically save more by participating in the DCRA than by taking the dependent care tax credit on your tax return. The DCRA plan provides tax savings on daycare expenses that allow you and your spouse (if married) to work full-time. Examples of eligible expenses include the cost for a baby-sitter, a licensed daycare center or nursery school. The cost for education (kindergarten or higher), overnight camps and expenses incurred while you are not working are not eligible for reimbursement. Click here for a complete listing of eligible and ineligible expenses.
Definition of Dependent
Congress recently enacted the Working Families Tax Relief Act of 2004 (WFTRA), which redefines the definition of "dependent" under §152 and "qualifying individual" under §21 of the IRS Code.
For a dependent to be considered a "qualifying individual" for purposes of DCRA expenses, the individual must be:
- Your dependent who is under age 13 and who lives with you more than 50% of the time. This is a new provision under the recent ruling
- Your spouse who is physically or mentally incapable of caring for him or herself
- Your dependent (age 13 and over) who is physically or mentally incapable of caring for himself or herself and for whom you are entitled a dependency exemption. This could include parents that are dependents.
How the DCRA Works — the MGIS Benefits Way
After estimating your dependent care expenses for the year, you decide how much to set aside for your DCRA. Your employer will deduct these funds from each paycheck (before taxes) and put them in a Dependent Care Flexible Spending Account. You may set aside up to $5,000 per year (if single, or married and filing jointly) or $2,500 per year if you are married and filing a separate tax return.
You may access the funds in your DCRA account instantly using the MGIS Benefits Purchasing Card. Simply give your daycare provider the debit card to pay for your service. If your daycare provider doesn't accept Visa or MasterCard, you simply pay for the service and submit a Dependent Daycare Reimbursement Request Form to MGIS. You will only have access to the amount of money you have deposited in your account year-to-date. Estimate your elections conservatively because the IRS guidelines state that any funds left in your account at the end of the plan year are forfeited to the plan sponsor.
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Consumer-Directed Healthcare Administration Specialists