Dependent Care FSAs Should Cover Families With a Homemaker
The GDP doesn't count homemaking as economic activity, but that doesn't mean their work is valueless
Courtesy National Gallery of Art, Washington
This post is about a technical point in employee benefits law, but is also about how the federal government has largely failed to value the contributions of homemaker parents to the general economy. Come for a discussion of an employment benefit you might not be aware of, and how it can be reformed. Stay for a detailed dive into why homemaking doesn’t normally get counted as part of the national economy by the federal government—although it should.
To begin with, the technical point:
Through a quirk of tax law, working parents can contribute to a tax-sheltered account called a “Dependent Care Flexible Saving Account.” Employees can put as much as $5,000 from paycheck deductions into FSAs to pay for childcare expenses.
The establishment of these accounts is one of those truly weird developments in tax law. Our tax code is not really driven by a grand plan. You could think of it instead like a multi-generational family home. Rather than one architect with a comprehensive blueprint designing everything, think of a house where grandma and grandpa built the main house according to their love of the Colonial Revival style. Then, their kids put on a big addition in the Brutalist style. Finally, the grandkids redecorate everything with the help of an interior decorator who loves twenty-first century minimalism. If you have a picture in your mind of how weird and bizarre this house must look, you also have a pretty good sense of how strange the tax code can be.
Dependent Care FSAs are one of those weird quirks in tax law. Congress was trying to incentivize employers to offer on-site childcare when it passed the relevant statute. Benefits administrators saw an opportunity to … well … administer some benefits, and brainstormed Dependent Care FSAs (which they then convinced the federal government to approve). The New York Times explained the creation of Dependent Care FSAs thus:
Congress laid the groundwork for the dependent care accounts in 1981, though it didn’t actually mean to do so. As Erin L. Kelly, a sociology professor at the University of Minnesota, chronicled in an aptly titled academic article called “The Strange History of Employer-Sponsored Child Care,” legislators were actually trying to encourage employers to start on-site day care centers or directly subsidize workers’ child care costs.
Through a bit of interpretive magic, however, benefits consulting firms saw an opening to administer savings accounts that employees would fund themselves with pretax money from their paychecks. Employers would hire the firms to run the accounts. After a few years of fits and starts, the accounts received an official blessing in Washington and the $5,000 limit became part of another bit of tax legislation in 1986.
The money from Dependent Care Accounts can be used to pay for babysitting, daycare, preschool, and camps for children under the age of 13.
However, families with a stay-at-home parent cannot use a Dependent Care FSA. For example, if Dad works full time, and Mom is home with their three kids, they cannot put money into a tax-sheltered account to pay for their oldest child to go to preschool a three days a week while Mom is home with twin babies. Or, to take a different example, they can’t use an FSA to pay for Mom to hire a babysitter to watch her 3-year old while she goes to the many needed doctor’s appointments for a high-risk pregnancy. Or for Mom to send her kids to a week-long camp in the summer while she deep cleans the entire house.
This is, I think, partially based in policymakers’ tendency to only value activity that shows up in the GDP. If Mom sends her kids to summer camp for a week while she is paid to deep clean someone else’s house, the family can use a Dependent Care FSA. If she is cleaning her own house, though, it doesn’t count.
And so we arrive at our second topic: the work of homemakers is generally not valued when we consider the economy. This is a deliberate choice. In the 1930s, Simon Kuznets created the economic indicators that would form the basis for our national GDP. He “agonized over whether to include the labor of unpaid household workers and caregivers in official statistics.” Kuznets did not end up including the value of homemakers in the GDP. As a result, our official statistics do not take into account the tremendously important role homemakers play in the economy. In 2010, “the Bureau of Economic Analysis . . . found that if the value of household production were included in gross domestic product (GDP), it would add approximately $3.8 trillion to the U.S. economy.”
As Oren Cass has pointed out in his brilliant book, The Once and Future Worker, this creates some strange distortions in how we value economic activity in the United States:
Sometimes growth is an accounting artifact, with work formerly done in the home moving into the market. For example, two mothers who would prefer to take care of their own children would create GDP growth by hiring each other as nannies instead, because unpaid work for one’s own family goes uncounted but paid work for someone else’s represents new economic activity.
Policymakers should recognize that homemakers do real work, and the work they do is valuable economic activity. I believe we should make a number of changes based on this fact—and one such change is that families with a homemaker should be able to use a Dependent Care FSA. This is a small change, but would be a worthwhile step towards appropriately valuing the women and men who devote themselves to the work of the home.
I have this benefit through my job and I've always been deeply confused by it, so I really appreciated the writeup. What do I have to do to get the $5k indexed to inflation?
Whoa! I had no idea a dependent care FSA couldn't be used for the reasons you listed. Spot on that eligibility should be expanded. Digging in on the eligibility website, I was surprised at the way they phrased daycamp and preschool cost eligibility though? It looks like it could be used even if a parent doesn't work?