Navigating the complexities of Dependent Care Assistance Programs (DCAP) can be challenging, especially when dealing with midyear election changes and nondiscrimination rules. This blog post will explore whether an employee can begin contributing to a DCAP midyear if their spouse’s contributions are cut off to avoid a nondiscrimination failure, and whether an employer can cut off an employee’s salary reductions midyear for the same reason.
Midyear DCAP Election Changes
One common scenario involves an employee who initially elected not to make DCAP salary reductions because their spouse, employed elsewhere, made a $5,000 DCAP election. If the spouse’s contributions are discontinued midyear to avoid a nondiscrimination test failure, the employee may wish to start making DCAP salary reductions. According to IRS officials, a cafeteria plan may permit this midyear election change if it allows changes due to a “change in coverage under another employer plan.”
Key Points to Consider:
- Plan Provisions: Ensure your cafeteria plan includes provisions for election changes due to changes in coverage under another employer plan.
- Employee Certification: The employee must certify that the change in coverage event occurred.
- Contribution Limits: The maximum annual DCAP exclusion for a married couple filing jointly is $5,000. Employees should not exceed this limit, considering the spouse’s contributions already made for the year.
Cutting Off Salary Reductions Midyear
Employers may also need to cut off an employee’s salary reductions midyear to comply with nondiscrimination rules. While not explicitly mentioned in IRS regulations, IRS officials have informally commented that such provisions do not violate the irrevocable election requirement.
Steps for Employers:
- Plan Provisions: Include provisions in your plan that allow the plan administrator to reduce or discontinue salary reductions to comply with nondiscrimination rules.
- Monitoring Compliance: Regularly monitor compliance with nondiscrimination rules throughout the plan year to make necessary adjustments before year-end.
Understanding and implementing midyear DCAP election changes and managing nondiscrimination compliance are crucial for both employers and employees. By ensuring your cafeteria plan includes the necessary provisions and monitoring compliance, you can navigate these challenges effectively.
Source: Thomson Reuters