How to Set Up a Dependent Care FSA for Your Company
A Dependent Care FSA is offered through a Section 125 “cafeteria” plan — the same legal framework that lets employees pay health premiums pre-tax. Setting one up is mostly a documentation and administration exercise, not a benefits-design one.
1. Adopt or amend a Section 125 plan document
You need a written plan document establishing the cafeteria plan and the Dependent Care Assistance Program (DCAP) as a component benefit, including the 2026 contribution limit ($7,500), eligibility rules, the plan year, and any grace period or run-out provisions. If you already have a Section 125 plan for a Health FSA, you're typically adding the DCAP as a new component rather than starting from scratch.
2. Choose a third-party administrator (TPA)
Most employers outsource claims processing, debit card issuance, and participant support to a TPA rather than handling it in-house. See choosing a plan administrator for what to evaluate.
3. Integrate with payroll
Employee elections need to flow into payroll as pre-tax deductions, spread evenly across pay periods for the plan year. Most TPAs integrate directly with common payroll platforms — confirm this before signing, since manual reconciliation is a common source of errors.
4. Run nondiscrimination testing
DCAPs are subject to their own nondiscrimination tests, separate from — and in some ways stricter than — the tests that apply to other cafeteria plan benefits. See nondiscrimination testing for the specifics. Test early in the plan year using projected elections, not just at year-end, so you have time to correct course if the plan is at risk of failing.
5. Communicate the benefit to employees
A Dependent Care FSA is easy to under-communicate — it's one line in an open enrollment packet, competing for attention with health plan choices. Given the 2026 limit increase is genuinely new information for most employees, this is a good year to call it out specifically rather than relying on generic enrollment materials.
Ongoing administration
- Process claims and card substantiation on your TPA's cadence.
- Handle mid-year election changes for qualifying life events.
- Track use-it-or-lose-it forfeitures at year-end per your plan's grace period or run-out terms.
- Re-run nondiscrimination testing each plan year — passing one year doesn't guarantee passing the next.
This is a general overview, not legal or tax advice. Plan document language, testing methodology, and compliance obligations should be reviewed with a benefits attorney, TPA, or CPA before you adopt or amend a plan.