Can an Employee Drop a DCAP Election Midyear If Free Childcare Becomes Available?

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Question: One of our employees would like to drop his DCAP election under our calendar-year cafeteria plan because a neighbor has offered to take care of his child at no cost. Can we allow this midyear election change?

Answer: Absolutely! However, there are specific conditions to consider. If your plan document has been drafted expansively, in line with IRS rules, midyear election changes due to changes in cost or coverage are permissible. Let’s break it down:

  1. Broad Application of Rules:
    • The IRS rules apply broadly to DCAPs, allowing midyear election changes in various circumstances.
    • These circumstances include changes in care providers or adjustments in the cost of care.
  2. Childcare Provider Switch:
    • A DCAP election change is permitted when a child transitions from a paid provider to free care (or no care, in the case of a “latchkey” child).
    • So, your employee’s situation aligns with this provision.
  3. Other Allowable Changes:
    • Beyond provider switches, other scenarios also warrant a DCAP election change:
      • Adjustments in the hours for which care is provided.
      • Changes in the fee charged by a provider.
  4. Relative Exception:
    • Be cautious: An election change isn’t allowed if the cost change is imposed by a care provider who is the employee’s relative (as defined by IRS rules).
  5. Health FSAs vs. DCAPs:
    • Remember that the cost or coverage election change rules apply broadly to DCAPs but not to health flexible spending arrangements (health FSAs).
    • This distinction is essential for employers to navigate effectively.

As an employer, staying informed about DCAP rules ensures that you can accommodate midyear changes when necessary. By understanding the nuances, you can support your employees while maintaining compliance with IRS guidelines. If you have further questions, consult your tax or employee benefits advisors.

Remember, flexibility within the rules allows for better employee experiences and smoother transitions.

Source: Thomson Reuters