Au Pair agency upfront fees and DCFSA

[razor5]

We will be hosting an Au Pair who will provide child care service Jan 15 2024 to Jan 14 2025. 

As many people know Au Pair cost overall consists of two major fees (1) A large single payment to agency (2) weekly stipend to au pair. We got to know both of these are eligible for DCFSA.

The agency fee of $10595 needs to be paid a month before i.e. December 2023.

We want to use 2023 DCFSA 5k to reimburse for the agency fee. IRS pub 503 https://www.irs.gov/publications/p503#en_US_2021_publink[phone number removed] says:

Expenses prepaid in an earlier year.

If you pay for services before they are provided, you can count the prepaid expenses only in the year the care is received. Claim the expenses for the later year as if they were actually paid in that later year.

So since agency fee is prepaid we can only claim it after the au pair service is rendered i.e. after Jan 2024. The DCFSA 2023 timeline says that the expense must be incurred between Jan 1 2023 - March 15 2024 (grace period)  and the deadline to file for receipt/claim is April 2024.

So I am wondering if the agency fee of $10595 needs to be prorated for the period of Jan 2024 - March 15 2024 and then claimed against 2023 DCFSA or can I claim full 5k of 2023 DCFSA for agency feee?

I will be filing my 2023 Tax return using TurboTax Home and Business Desktop Software.

I found two previous discussion around this here and they are conflicting: 

1. https://ttlc.intuit.com/community/tax-credits-deductions/discussion/re-au-pair-upfront-fees/01/18511...

2. https://ttlc.intuit.com/community/tax-credits-deductions/discussion/how-to-claim-au-pair-upfront-fee...

[tagteam]

@Critter-3 

[Opus 17]

It is up to the FSA administrator to follow the rules and make sure the costs are properly substantiated.  So ultimately, you need to ask them what they will cover and what proof they will require.

I suspect that you will need to submit a claim in March, 2024, and you will only be able to claim the cost of care from 1/3-3/15 (which would be around $2000 of the pro-rated up-front fee, plus the weekly stipend.)  However, you can't include any part of the costs that are for housekeeping services, just the child care.

If you can't add up to $5000 of expenses, you may forfeit the balance of the account.  And, you would have to upfront the money and then request reimbursement in March, I suspect the plan won't pay you before the care occurs.  

If you also have a DCFSA for 2024, you should have no problem getting the full reimbursement for amounts paid from 3/15-12/31.

You don't say if you had other care expenses in 2023, those could also be reimbursed, of course, to get the money out of the account. 

Also remember that the au pair only qualifies for the DCFSA treatment if the child care is provided so that you and your spouse can both work, or go to school full time.

Lastly, your 2023 tax return will list the $5000 DCFSA benefit on form 2441.  If you have no qualifying expenses for 2023, you will report that you carried forward the entire $5000 to 2024.  

[razor5]

Thank you. 

It is interesting to know that it depends on FSA Administrator. Isn't there a Federal tax guideline which they need to specifically follow around this? 

I did talked to them earlier twice and both times they were confused and not sure about whether I can claim the full amount or need to pro-rate. They said it can only be determined once I submit for reimbursement. I have just paid the agency fee so I can do the submission and see what happens. I think they wouldn't pay before but at least approve or deny the request on submission.

I did not had any other childcare expense in 2023 so I don't have any other place where I can use it. The concern I have here is that I still have time to adjustment my DCFSA contribution depending on whether 2023 can cover whole agency fee or just prorated because my last paycheck still need to make the contribution and I can do a change of care needs event and adjust DCFSA contribution going forward to stop over contribution.

Worst case, which I am thinking is lets say I go ahead and contribute 5k. I can only cover prorated till March 15 which according my calculation will be 3600. I will have 1400 reminder which will get lost if I don't use it. What are some ways in which I can use this amount? Au Pairs work hours and duties are federally defined they can only do childcare works and only work 45 hours in a week. I am wondering if I can hire a babysitter for weekend and use DCFSA for that or will it not be covered since weekend is not working days? 

Thanks. 

[Opus 17]

@razor5 

Yes, there are a number of federal regulations the FSA administrator must follow, although I don't have a link to them.   If the FSA plan makes too many unallowable payments, and the IRS audits the plan, the employer can be barred from offering an FSA benefit in the future.  This is one of the reasons that the employer hires a benefits administrator company to handle the plan (in most cases) so they don't have to know the rules themselves.  The plan must do some kind of verification that the payments are legitimate, for example by requiring a receipt, the name of the care provider, and a signature from you certifying that the expenses were provided for qualifying care.  

There is, of course, a second level of verification.  You must certify when filing your tax return that everything on your tax return is true, and this includes that the child care expenses you report are "qualifying" under the regulations.  The bottom line is that if you submit a claim for non-qualified expenses, then even if the plan allows it (because of sloppy bookkeeping, or a good faith error), you are still subject to audit yourself (although most taxpayers are never audited, the odds are about 1%).

As far as hiring another babysitter for nights or weekends, remember that care is only qualifying if it is provided while you are working. Babysitting so you can have a date night is not qualifying care for the credit.  (Suppose you work the night shift and your spouse works days.  Could you hire a caregiver to watch your children during the day while your wife was at work so you could sleep?  I don't know the answer to that one.)  

Of course, if you have a receipt from the caregiver that just says "babysitting services" or something, and you certify that it was for qualifying care, you can probably get reimbursement from the plan.  They aren't going to ask to see your time card.  And form 2441 just asks for the amount spent for "qualifying care" and the name and tax number of the provider, so you could include the expenses as qualifying care on form 2441, and only get caught if audited.  But the legally correct thing to do is to only submit an FSA claim for "qualifying expenses" and to only include "qualifying expenses" on your tax return.

Based on the pro-rata rule for prepaid expenses, it seems to me that you will only have $3600 of qualifying care before the expiration of the grace period.  But I could be wrong, and if you want a definitive answer, you will need to hire your own expert who will stand behind you if audited.  

[razor5]

@Opus 17 

Hello, I wanted to follow back on this as we are in middle of tax filing.

Based on previous recommendation and safest option I made pro-rated contribution of ~3600 for 2023 DCFSA for coverage til March 15 2014. I already submitted the expense and received the payment of ~3600 from my

plan admin in 2024.

Now I am trying to find out how to correctly file this 2023 DCFSA contribution which was used in 2024.

Earlier you said

Lastly, your 2023 tax return will list the $5000 DCFSA benefit on form 2441. If you have no qualifying expenses for 2023, you will report that you carried forward the entire $5000 to 2024.

I am using TurboTax Deluxe Desktop Version.

1) Where and how will I report this contribution in 2023? It does show up on 2023 W2 and so far it is being taxed and I believe I need to do something to ensure it does not get taxed.

2) If I used the money in 2024 then for 2023 I will report it as being carried forward. How will my 2024 tax filing work? I am contributing max 5k in 2024 and will be using all of it in 2024.

3) What is the best way to check in form view that the above ~3600 contribution is not being taxed in TurboTax?

Thanks.

[RobertB4444]

Do you have any dependent care expenses in 2023?  Because it will be used to offset those if so.  Even though you weren't actually reimbursed until 2024.  

Check form 2441 in forms view.  The $3600 should appear there as reimbursement.

If you still have no 2023 expenses then as you said back in December then the distribution is taxed for the year that you received it.  The plan administrator should then issue another $3600 in 2024 for those expenses.  

If you never actually received the benefits in 2023 then the W2 should be corrected.

@razor5 

[razor5]

I don't quite fully understand your answer.

I do not have any eligible child care expense in 2023. The au pair service was received in in 2024 and with the grace period limit of usage the 2023 contribution can be used till March 15, 2024.

If you never actually received the benefits in 2023 then the W2 should be corrected.

Why so? The contribution was made in 2023 the W2 reflects the contributions made not when it was used. For example it is similar to HSA contribution which shows up on W2 of the year the contribution was made even when person can choose not to use it in that year.

If you still have no 2023 expenses then as you said back in December then the distribution is taxed for the year that you received it. The plan administrator should then issue another $3600 in 2024 for those expenses.

I don't understand this statement.

[RobertB4444]

You received $3600 in 2023.  It shows as paid to you on your 2023 W2.  It becomes taxable in 2023 unless you have expenses in 2023 to offset it.  

Your plan at work allows you to use the funds in 2024.  Which is cool - in 2024 you will not have a payout shown on your W2 so you will get a deduction for the 2023 payout.

But the 2023 payout is taxable in 2023.  You have to have expenses to match the amount that you received in 2023 or it is taxed in the year in which it is paid.  

In 2020 there were rules passed that allowed FSAs to roll amount forward from year to year but those rules have expired.  You have to use the amount paid to you in the year it is paid or it is taxable.

Here is the IRS on that.

@razor5 

[razor5]

Thanks for the prompt reply.

Your plan at work allows you to use the funds in 2024. Which is cool - in 2024 you will not have a payout shown on your W2 so you will get a deduction for the 2023 payout.

I don't understand this part completely. I referred to the pub 503 and specifically this section:

Expenses prepaid in an earlier year.

If you pay for services before they are provided, you can count the prepaid expenses only in the year the care is received. Claim the expenses for the later year as if they were actually paid in that later year.

So if I am understanding correctly what you are saying is similar to this. In 2023, the 3600 will be considered taxable and I will need to pay taxes on it. I cannot claim it in 2023 tax return since the service was provided in 2024 and I will claim this in 2024 tax return instead.

So in 2023 this section will be empty/0.

Should I still do something in this section for 2023 to report that I prepaid the child care agency in 2023 I see this section which ask for 2023 year payment.

I am also contributing maximum limit 5k in DCFSA for 2024 which will be used in 2024 itself. So next year when I go for filing 2024 I will claim 5000 + 3600 (from 2023) = 8600 as child care expense the above section in TurboTax. I see that in that section TurboTax as if there was any carryover used from previous year in this year. Current year (2023) screenshot example:

Is this correct? Later on in the section I see that it says that I can only get credit for up to 3000 for one dependent and 6000 for two dependents. I thought whole 5000 max contribution is tax deductible per year. Is this not correct?

[razor5]

@RobertB4444 

[RobertB4444]

$3000 is the maximum amount that you can enter per dependent.  If your income is in the right range then that $3000 is a $600 deduction and the maximum deduction is $1200.  You should have $8600 in expenses in 2024 and only $5000 in reimbursement on your 2024 W2 form so you will hopefully get a deduction for that.

@razor5 

[razor5]

Hello @RobertB4444. Thanks for the response.

I think I was mixing up DCFSA Contributions and Dependent Care Credit with each other. I assumed that DCFSA contribution would need to be reported somehow in the "Child and Depended Care Credit" section to make sure that it does not get taxed.

Since DCFSA contribution is already excluded from income in W2 they are not taxable. If I would not have used it till the grace period I would have lost all the contributions. So they are treated non-taxable in 2023 itself and not using would have just resulted in all money being lost.

I just needed to report this correctly in TurboTax W2 section to get my federal tax lowered. After entering my W2 information. TT asks me this for DCFSA contributions.

I believe the answer here is No because my employer did not provide onsite child care service like onsite daycare etc. They just let me contribute to DCFSA.

Later on in the same W2 section it asks money left in the account. In learn more it says to include money which I am carrying over if my plan allow grace period. If I enter my total contribution as amount here TT does the calculation and reduces my federal and state tax. Earlier I had it set to 0 thinking it would be considered used even if I used in 2024 grace period. If I set it to 0 it increased my taxes. So I believe the right thing to do here is set the carry over amount in 2023 here even if I used it grace period.

Can you please confirm that this is correct? Which form and fields can I check in field view to ensure that DCFSA contributions are correctly being treated non-taxable in TurboTax?

Additionally going back to "Child and Depended Care Credit". Since I did not had any child care expense in 2023 I don't think I need to fill anything here. Although if I try to do it in TT and fill my expense as 0

TurboTax starts asking me care provider details

So I think the right thing here will be to not report anything here. Is this correct?

[DianeW777]

Yes, you enter the actual amount that is carried over to 2024 (unused in 2023). If you did not pay for any childcare in 2023, even though you are allowed to use it in the grace period of 2024, the whole premise of being tax free is that it is used for childcare.  If you do not use any in 2023, then the amount in your W-2 will be taxed.

When Dependent Care Benefit is reported in box 10 of your W2, you must file Form 2441 to reconcile the money used in the FSA as a qualified expense. If you do not have qualified expenses to offset the amount in box 10, it is added back to as income on your return. See the expiration below for the special grace period.

• Instructions Form 2441

The temporary special rules for dependent care flexible spending arrangements (FSAs) have expired.

The temporary special rules under Section 214 of the Taxpayer Certainty and Disaster Tax Relief Act of 2020 that allowed employers to amend their dependent care plan to carry forward unused amounts from 2020 and/or 2021 to be used in a subsequent year have expired. For 2023, you may only enter on line 13 amounts you carried over from 2022 and used in 2023 during the grace period. See the instructions for line 13.

@razor5