Dependent Care Flexible Spending Account Participation Among Low- and Moderate-Income Parents: Barriers and Risks

Background: Dependent care flexible spending accounts (DCFSAs) are tax-advantaged reimbursement accounts to which employees may contribute to pay for qualified dependent care, if their employer chooses to offer the benefit. Access to DCFSAs among U.S. workers is uneven and research suggests higher-income employees reap the majority of the benefits DCFSAs may offer. Additionally, a few employers also offer child care subsidy programs geared toward LMI parents that are administered through DCFSAs. Overall, data collected on DCFSA and employer-sponsored child care subsidy program accessibility, utilization, barriers, and risks are extremely limited and none focus specifically on the most vulnerable parents in the U.S. – those with low- and moderate-incomes (LMI).

Data and Method: In this mixed methods study, we present results from a unique sample of LMI tax filers who used Turbo Tax Freedom Edition – a free tax filing platform for LMI tax filers – and participated in a subsequent survey in 2018. Within this survey population (~16,000), only tax filers with dependents under 18 in their household and who were employed were asked questions about DCFSA availability at their workplace and DCFSA utilization (~1,300). Among these workers, only a fraction reported having access to DCFSAs (~200). Thus, analyses were limited to examination of bivariate relationships. In order to illuminate LMI parents’ participation in employer-sponsored child care subsidy programs that are paid through DCFSAs, we used snowball sampling to identify and interview Human Resource professionals at three U.S. universities that offer such programs.

Findings: Results suggest that liquidity constraints of LMI families and confusion about DCFSA rules and requirements act as barriers to accessing what modest tax savings may be available to them through DCFSA participation (p <0.05). For LMI families with children age 5 and under, those who would likely most benefit from child care cost savings, DCFSA use was associated with bank account overdrafts (p <0.05). These findings suggest that LMI families face both barriers and risks related to DCFSA participation. Interviews with employers offering child care subsidies through their DCFSAs indicate that even though subsidy programs are designed to favor LMI parents over higher-income employees, the complexity of DCFSA use and reimbursement processes present barriers to participation.

Significance: Given the paucity of financial supports for child care expenses available to LMI parents, these findings suggest that the barriers and risks associated with DCFSA participation represent a missed opportunity to provide families with resources to help them afford high quality child care. While DCFSAs and employer-sponsored child care subsidies paid through DCFSAs may aid some parents, our findings suggest that policy modifications to the mechanisms that govern these accounts may make DCFSAs more accessible and valuable to LMI families by reducing barriers to and risks of participation.