United States 

Office of 

Personnel Management 

The Federal Government’s Human Resources Agency 

Benefits Administration Letter 

Number: 03-803 Date: June 3, 2003 

Subject: Dependent Care Flexible Spending Accounts and other Child Care Subsidies 

Since we published BALs 03-306 and 03-801 we’ve heard from a number of human resource and 

payroll administration staff asking questions and expressing concerns about agency responsibilities for 

employees who are eligible for an agency’s child care subsidy program and who also make an election 

to participate in a dependent care flexible spending account (DCFSA). This BAL provides additional 

background and guidance on this issue. 

Public Law 107-67, Treasury and General Government Appropriations Act, 2002, Section 630, Title 

VI—General Provisions Departments, Agencies and Corporations, authorized permanent legislation 

enabling Executive Agencies to implement child care subsidy programs for their qualified Federal 

employees. With the new Federal FSA Program being implemented July 1, agencies may find that they 

have employees who are receiving a child care subsidy as well as participating in the DCFSA. 

In accordance with Section 129 of the Internal Revenue Code, an employee can generally exclude from 

gross income up to $5,000 of benefits received under a dependent care assistance program each year. 

The limit is reduced to $2,500 for married employees filing separate returns. The exclusion cannot be 

more than the earned income of either the employee or the employee's spouse. The total dependent 

care benefits the employer paid to the employee or incurred on the employee's behalf (including 

amounts from a Flexible Spending Account, Section 125 plan) should be reported in Box 10 of Form 

W-2. Any amount over $5,000 should be included in Boxes 1, 3, and 5, as "wages," "social security 

wages" and "Medicare wages." 

Therefore, if an agency has a tracking mechanism that allows them to monitor the aggregate amount an 

employee is receiving through a Dependent Care Flexible Spending Account and a child care subsidy, 

that agency is responsible for deducting appropriate employee taxes and remitting both the employee 

taxes and the employer share of FICA once the $5,000 (or $2,500) is reached. 

If for some reason the agency does not realize the employee has exceeded the $5,000 limit on 

dependent care and therefore did not remit employee taxes, the employee will reconcile that with the 

IRS at the time they complete and submit their taxes while filing their taxes for the prior tax year. 
 

 

 

Here are a few examples that describe this situation: 

Example #1 Federal Employee married to Non-Federal Employee 

Mary Johnson is a federal employee, married to Rick who works for ABC Company. They 

have two children, aged 8 and 4. Mary’s agency participates in the child care subsidy, and 

based on income, receives an annual subsidy of $1,500. Although they do not have a 

cafeteria plan Rick’s employer, ABC Company, also assists its employees with child care 

expenses. Under the ABC program, Rick receives $1,000 per year. 

During the initial Open Season, Mary elects to allot $3,000 into a DCFSA. With their 

combined child care assistance and FSA election, Mary and Rick exceed the $5,000 annual 

maximum by $500. Since this information could not be known by each employer, Mary and 

Rick will reconcile any additional taxes owed when they complete and file a tax return on or 

before the next April 15th. 

Example #2 Federal Employee Transfers Between Two Agencies that Offer Subsidies 

Marlene works for Agency #1 which participates in the child care subsidy program. She 

receives $3,000 per year. In May 2003, she elects to allot $2,000 into a DCFSA beginning 

July 1st. Marlene transfers to Agency #2 in September, covered under the Federal FSA 

Program. That agency also offers a child care subsidy program, and Marlene is eligible for 

$2,000. 

While the DCFSA would transfer with Marlene, the subsidies are individual to each agency. 

Marlene’s new agency would have no information about any subsidies she had received at 

Agency #1. Again, Marlene will reconcile any additional taxes owed when she files her tax 

return on or before the next April 15th. 

We hope this information is helpful. If you have any questions, please contact Jennifer Hirschmann. 

She can be reached at 202-606-1413, or by email at jxhirsch@opm.gov. 

Frank D. Titus 

Assistant Director 

for Insurance Services 

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