It’s no secret that robust benefits can help not-for-profits attract and retain employees. One benefit you might not offer, but should consider, is a dependent care Flexible Spending Account (FSA). Childcare costs are rising 1.5 times faster than inflation (according to the Bank of America Institute), and your staffers with young children might appreciate the tax and other advantages of participating in a dependent care FSA.

Adopting a program

To sponsor dependent care FSAs, your organization will need to set up a dependent care assistance program (DCAP). Under your program, you’ll sponsor FSAs staffers can use to pay eligible expenses. These generally include daycare, before- and after-school care and summer day camp expenses. These FSAs also allow payments for care for dependent adults who can’t care for themselves. Any qualifying expense must enable a participating employee (or, if applicable, a spouse) to work or seek employment.

Employees need to opt in to open a dependent care FSA. They can choose this benefit during your open enrollment period or after experiencing a qualifying life event (such as the birth or adoption of a child). Then they make pretax compensation deferrals to their accounts, up to $7,500 per household or $3,750 for those married but filing separately in 2026. (These are increases from the 2025 limits of $5,000 and $2,500, respectively.)

Employers and employees win

For employers and employees, dependent care FSAs can offer multiple advantages:

1. They can help employers attract strong job candidates and retain employees — especially working parents and those caring for adult dependents such as elderly parents.
2. Pretax contributions are exempt from Social Security and Medicare taxes. This reduces the payroll tax burden for both employers and employees. To increase participation in your plan, you may make contributions to employees’ accounts up to combined employer/employee annual contribution limits of $7,500 (household) and $3,750 (married filing separately).
3. Using pretax dollars to fund their accounts allows staffers to pay for qualifying care while reducing their taxable incomes.

Learning how to operate their FSAs also enables participants to manage dependent care expenses more mindfully.

Note regulations and risks

You’ll need to ensure that your DCAP complies with IRS regulations. These include nondiscrimination rules that prevent benefits provided under the program from disproportionately favoring highly compensated employees. Failure to comply can jeopardize the program’s tax-advantaged status. In addition, proper recordkeeping, timely reimbursements and clear communication are critical.

Excellent communication is particularly important when it comes to the “use it or lose it” aspect of dependent care FSAs. Individual account balances don’t roll over from year to year. Any unused account funds at the end of a calendar year generally revert to the employer. In fact, employers “own” dependent care FSAs. This means that the accounts aren’t “portable” if employees leave your organization. So participating staffers need to plan accordingly.

Gathering information

To learn more about dependent care FSAs and how to establish and administer a program, contact us. Note: You don’t want to risk investing time and resources into designing a DCAP and launching FSAs only to learn your staffers aren’t interested. For this reason, we recommend you conduct a benefits survey before making any changes to your benefits menu.