Dependent Care: How we do it

When my daughter was born, one of the first things my husband and I did was enroll in the Dependent Care benefit option at work. For those of you not familiar, Dependent Care works similar to a Health Savings Account or a Flexible Spending Account. You contribute money, pre-tax, and then draw on that money to offset child care expenses. There is a $5000 limit for one child and a $6000 limit (total, not per child) for two or more children. However, unlike an FSA or HSA, you cannot draw on money you have not contributed; you may only draw on money that is in your account. This can make things a little tricky at first especially if you’re not paying attention.

When we first started paying for daycare, we had no idea how to use our DCA effectively. It took about 8 months of confusion, moving money around and manipulating the checking account until we devised a system that has worked splendidly for the last 3 years. It works so well, in fact, that at the end of the year we wind up paying only 1 week out of pocket!

Before I explain what we do, let me break down what it costs and how we pay (and why). We currently pay $165 per week for our daughter, which should be $660/month, right? Wrong. Why? The owner is an idiot and does some sort of complicated formula where she calculates that daily rate and the actual number of days in a month and then makes that the monthly rate (OK, fine, it’s logical but the owner is still an idiot. I stand by my statement). Rather than paying the monthly rate, we pay weekly; rather we pay bi-monthly. Each payday, I write out a check for the upcoming two weeks for $330. Why don’t I pay by debit or credit? Because she tacks on a 3.5% fee for that privilege. So I’ll write checks instead. Fine with me–it makes her have to do some work.

Now for the dirty details. Let’s do a list:

• Of that $330, $165 comes out of our pockets and $165 of our DCA contribution is used
• Our DCA contribution every two weeks is $192.30 ($5000 max benefit/26 paychecks)
• We are left with a balance every two weeks of $27.30.
• Every 3 months, we have 1 week saved
• By December, we have 3 weeks balance remaining in our DCA account

This extra 3 weeks leftover means that we only have to pay 1 week in December, or if we do have to pay, it’s a nominal amount. Having that extra money available in December is great because we get absolutely slammed financially that month: Christmas, Hanukkah and our daughter’s birthday (yes, I know we should be planning and budgeting for this in advance. We’re working on it).

Our system, while seemingly cumbersome, actually is quite beneficial. Besides not having to pay in December, it also helps offset the out of pocket cost each month, spreads the money out over the year instead of concentrating it in one part, and, yes, we still get to deduct the difference in total amount paid and the $5000 on our taxes. The only pitfall in this plan is the fact that on payday, I have to remember to fax a completed form with information like my daughter’s age, the name/address/EIN of the provider and signed by the assistant director or owner and my husband to the company. As I am a forgetful Jones, I have a hard time remembering this. But I combat the problem by leaving a little note on my computer that says “Dependent Care”.

While I wish I didn’t have to pay for daycare at all and I dream of the day she starts kindergarten and childcare expenses go away, maximizing our Dependent Care benefit has paid off.

Do you use a Dependent Care Account? If so, how do you structure your payments to maximize the benefit?