Can you use a HSA for daycare?

Learn about the latest updates on using a Health Savings Account (HSA) for daycare expenses in 2024.

In recent years, parents have been looking for innovative ways to save money on daycare expenses. One option that has gained popularity is using a Health Savings Account (HSA) to cover the costs. HSAs were originally designed to assist individuals with medical expenses, but can they be used for daycare as well? Let's explore this topic and understand the ins and outs of using an HSA for daycare.

Can you use HSA for daycare?

Yes, you can use an HSA to pay for daycare expenses, but there are certain eligibility criteria that need to be met. To qualify, the daycare must be used to either allow you or your spouse to work, look for work, or attend school full-time. Furthermore, the daycare provider must meet specific requirements set by the IRS. These requirements include being licensed, certified, or registered by your state, and complying with all applicable laws and regulations.

When it comes to using your HSA for daycare expenses, it's important to understand the rules and limitations. The IRS allows you to use your HSA funds to pay for eligible expenses, which include medical, dental, and vision care expenses. However, daycare expenses are considered eligible only if they are necessary for the care of a child under the age of 13, or for a dependent of any age who is physically or mentally incapable of self-care.

Using your HSA for daycare expenses can provide significant financial benefits. By using pre-tax dollars from your HSA, you can effectively reduce your taxable income, which can result in lower overall tax liability. This can be especially advantageous for families with young children who require daycare services on a regular basis.

It's important to note that not all daycare expenses are eligible for reimbursement from your HSA. While the cost of childcare services is generally eligible, other expenses such as transportation, extracurricular activities, and overnight camps may not be covered. It's always a good idea to review the IRS guidelines or consult with a tax professional to ensure that you are using your HSA funds appropriately.

When using your HSA for daycare expenses, it's also important to keep accurate records. The IRS requires that you maintain documentation, such as receipts or invoices, that clearly show the date, amount, and nature of the expense. This documentation is essential in case of an audit or if you need to provide proof of eligibility for reimbursement.

In conclusion, while you can use an HSA to pay for daycare expenses, there are specific eligibility criteria and rules that need to be followed. By understanding these guidelines and keeping accurate records, you can take advantage of the tax benefits offered by using your HSA for daycare expenses. Remember to consult with a tax professional or review the IRS guidelines for further information.

Can you use a health saving account (HSA) for daycare?

HSAs are a tax-advantaged account that allows individuals to save and pay for qualified medical expenses. While daycare expenses don't fall under traditional medical expenses, there are provisions that allow the use of HSA funds for this purpose. To be eligible, both parents must be working or looking for employment, and the daycare must be used primarily to care for a child under the age of 13.

What are the benefits of using an HSA for daycare?

Using an HSA for daycare expenses can provide several benefits. First and foremost, contributions to an HSA are tax-deductible. This means that you can reduce your taxable income by the amount contributed, which can result in significant savings. Additionally, any funds withdrawn from an HSA for qualified daycare expenses are tax-free. This double tax advantage can greatly reduce the financial burden of daycare costs.

Furthermore, HSAs offer the flexibility of using pre-tax dollars to pay for daycare expenses. This means that the amount contributed to the HSA is not subject to federal income taxes, Social Security taxes, or Medicare taxes. This can lead to substantial savings over time, especially for parents with high daycare costs.

What are the downsides of using an HSA for daycare?

While using an HSA for daycare can be advantageous in many ways, there are also limitations and downsides to consider. One potential drawback is that not all employers offer HSAs as part of their benefits package. If your employer does not offer an HSA, you won't be able to take advantage of this option.

Additionally, there are contribution limits for HSAs. In 2024, the maximum annual contribution for an individual with self-only coverage is $3,750, while for individuals with family coverage, it is $7,500. If your daycare expenses exceed these limits, you may need to explore alternative ways to cover the additional costs.

Lastly, it's important to note that improper use of HSA funds can lead to tax penalties. If you withdraw funds for non-qualified expenses, you may be subject to income tax and a 20% penalty. It's crucial to understand the rules and regulations surrounding HSA expenses to avoid any potential issues.

HSA vs FSA for daycare

Another option that parents often consider when it comes to daycare expenses is a Flexible Spending Account (FSA). Like an HSA, an FSA is a tax-advantaged account that can be used to pay for qualified medical expenses. However, there are significant differences between the two.

One key difference is that with an FSA, you must use the funds within the plan year or risk losing them. HSAs, on the other hand, allow you to carry over any unused funds from year to year. This can be advantageous if your daycare expenses fluctuate or if you want to build up a reserve for future expenses.

Additionally, while both HSAs and FSAs offer tax advantages, the contributions to an FSA are subject to a lower annual limit. In 2024, the maximum annual contribution to an FSA is $2,750. If your daycare costs exceed this limit, using an HSA may provide a greater advantage.

Where can you find more information about HSA eligibility for daycare?

If you're considering using an HSA to cover daycare expenses, it's important to gather detailed information about eligibility requirements. The Internal Revenue Service (IRS) provides comprehensive guidelines regarding qualified daycare expenses and the specific criteria that must be met. The IRS website is a valuable resource that can help answer any additional questions you may have and ensure that you are in compliance with their regulations.

Furthermore, consulting with a qualified tax professional or financial advisor can provide personalized advice based on your unique situation. They can help you navigate the complexities of HSAs, as well as provide guidance on maximizing your tax savings.

In conclusion

Using an HSA for daycare expenses can be a smart financial move for eligible individuals. With the potential for tax deductions and tax-free withdrawals, it can help ease the financial burden of childcare costs. However, it's crucial to understand the eligibility criteria and any limitations associated with HSAs. By doing so, you can make an informed decision about whether using an HSA for daycare is a viable option for your family.

What do you do if you're unsure?

If you’re unsure, it’s best to consult your HSA provider or a tax professional to confirm expense eligibility. 

What are HSA benefits for employers?

If you’re an employer, there are multiple benefits to offering HSA to your employees, including:

  • Attracting and retaining talent
  • It’s a cost-effective healthcare option
  • Enhances employee satisfaction and productivity
  • Increases the utilization of employee benefits
  • Has tax advantages for both you and your employees

Want to learn more? Check out our blog on what is an HSA

Get started with Forma today

Looking to offer an HSA as part of your employee benefits package? At Forma, we provide Pre-tax Accounts - including HSAs - to companies worldwide. 

If you want your business to profit from the employee and employer benefits of HSAs, fill out the form below, and one of our experts will be in touch.