With this feature, employees can contribute pretax dollars into an account that can ultimately reduce out-of-pocket costs for dependent care expenses.
Understanding Dependent Care Limits and Tax Treatment
Dependent Care Flexible Spending Account (FSA) under the section 125 plan have a pre-tax deduction code of 125DC Reg. The transaction type will deduct from the employee's pay pre-tax for most mandatory withholding taxes, but only up to the annual IRS limits.
How Dependent Care FSA Deductions Work
When you select 125DC Reg from the Vertex Deduction Code dropdown, the system automatically applies the current year's contribution limit.
Processing Logic:
- Deductions are taken pre-tax and reduce taxable wages up to the annual limit
- Once the year-to-date (YTD) contributions reach the limit, any excess deductions automatically switch to post-tax
- The system will still attempt to process these excess deductions from the employee's paycheck
To prevent over-contributions: Set the annual limit manually in the employee's deduction setup. This ensures deductions stop once the limit is reached rather than switching to post-tax treatment.
Dependent Care FSA Transaction Type Set Up
To set up Dependent Care Sec125 deduction, go to Admin Tools > Transaction Type > Detail tab.
Dependent Care Benefit Transaction Type
- Open Admin Tools > Transaction Type > Detail.
- Click Add New.
- Select a descriptive name that easily identifies the Dependent Care transaction type for your users.
- Set the Type field to Is Permanent.
- Set the Deduction Category to the appropriate group for GL mapping purposes.
- The Pre-Tax Deduction code must be 125DC Reg. This is critical to correct taxation and will make the deduction pre-tax as well as respect the annual limit.
- Set the W2Box and W2Label fields to ensure proper FSA reporting on Form W-2s for employees.
- Select all the branches that will use this transaction type.
- Click Save.
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