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

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

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

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

Understanding DCAP Reimbursement Rules: Can You Pay Your Child for After-School Care?

Can Our DCAP Reimburse Expenses for the Care of a Child Who Will Turn 13 Later in the Plan Year?

A participant in our company’s Dependent Care Assistance Program (DCAP) faces a common scenario: hiring an adult son to provide after-school care for their 10-year-old daughter. The burning question: Can the DCAP reimburse payments to the son? Let’s dive into the details.

  1. Eligibility for Reimbursement:
    • Payments to certain relatives or dependents do not qualify for reimbursement under the DCAP requirements.
    • Specifically, a DCAP cannot reimburse payments to an employee’s child who is under age 19 at the end of the year or to someone whom the employee (or the employee’s spouse) could claim as a dependent.
    • Whether the DCAP can reimburse the participant for care provided by the son hinges on the son’s age and whether the participant (or the participant’s spouse) can claim him as a dependent for federal income tax purposes.
  2. Limitations on Reimbursement:
    • DCAPs cannot reimburse payments to an employee’s spouse or to the parent of an under-age-13 qualifying child (e.g., an employee’s former spouse who is also the child’s parent).
    • It’s essential to communicate this information clearly in your DCAP summary or open enrollment materials.
  3. Documentation Requirements:
    • Participants must include specific details when claiming an exclusion for reimbursement of dependent care expenses on their tax returns (using Form 2441).
    • For individual care providers, participants need to provide the name, address, and taxpayer identification number (TIN) (usually the Social Security number).
    • Exempt organizations require only the provider’s name and address.

In summary, while the DCAP can potentially reimburse payments for care provided by the son, it’s crucial to understand the eligibility criteria, limitations, and documentation requirements. Clear communication and accurate reporting are key to ensuring compliance with DCAP rules.

Source: Thomson Reuters

Can an Election Be Changed After the Plan Year Has Begun When an Employee Made a Mistake in Completing the Election Form?

Can an Election Be Changed After the Plan Year Has Begun When an Employee Made a Mistake in Completing the Election Form?

QUESTION: One of our employees just noticed that her 2023 pay reflects a salary reduction for DCAP benefits. Initially, she said she never elected DCAP benefits. But when we showed her the DCAP election on her election form, she responded that she had made a mistake in completing the form and asked if we could fix it. Can we do this under the IRS rules? 

ANSWER: Possibly, if you conclude that (1) there is “clear and convincing evidence” that your employee made a mistake; (2) the mistake is of a type that can be corrected; and (3) the correction is appropriate. (You may need more information before you can reach these conclusions.) While IRS cafeteria plan regulations do not address election changes for mistakes, IRS officials have informally commented that an employee’s election may be undone when there is clear and convincing evidence of a mistake. Some plans use an “impossibility” approach for evaluating whether such evidence exists, while others use a “facts and circumstances” approach. When the impossibility approach is used, an election change is allowed only if the evidence indicates that it was impossible for the employee to benefit from the mistaken election. For example, you could undo your employee’s DCAP election if she has no qualifying individuals. This approach is more cautious and is easier to administer because it does not involve examining an employee’s intentions or motives. 

With the facts-and-circumstances approach, mistakes may be corrected if the plan administrator can reasonably ascertain that a mistake actually occurred. (This may involve inquiry into an employee’s intentions.) When this approach is used, we suggest adopting and consistently following written guidelines that require consideration of factors such as the employee’s past elections and benefit usage (e.g., whether your employee has elected DCAP benefits in the past or has consistently used her spouse’s DCAP); plausible evidence of a clerical mistake (e.g., an employee might easily write $5,000 instead of $500, but it is less likely that $5,000 was written instead of $2,400); assessment of the employee’s truthfulness; proximity to the first payroll date after the new election is in force; and any change in the employee’s circumstances that might indicate reconsideration rather than mistake. In addition, we suggest obtaining a signed certification from the employee describing the mistake and the intended election (e.g., if she intended to elect health FSA benefits instead, the appropriate correction would be an election of such benefits). A plan might also establish a time limit for requests to correct mistaken elections. 

Under either approach, if the clear and convincing standard is met, an employee’s clerical, arithmetic, and data-entry errors may be corrected retroactively. (Note that the correction may also involve correcting mistaken payroll withholding.) But mistakes as to a benefit’s scope or tax treatment generally cannot be corrected. For example, your employee could not change her election because she mistakenly believed that the DCAP provided greater tax savings than the dependent care tax credit. 

To reduce the likelihood of election mistakes surfacing after the plan year has begun, many employers provide employees with written confirmation of their elections after open enrollment and before the beginning of the new plan year. Employees are instructed to review their elections and notify the employer before the plan year begins if any corrections are needed. 

Source: Thomson Reuters 

Can an Election Be Changed After the Plan Year Has Begun When an Employee Made a Mistake in Completing the Election Form?

When may an employer take a tax deduction for FSA reimbursements and other benefits?

As a general rule, an employer may not take a tax deduction for flexible spending account (FSA) benefits until the benefits are provided to employees. Thus, no deduction may be taken at the time of the employee’s salary reduction. Moreover, employers who transmit salary reduction amounts to a third-party administrator (TPA) for administration of claims should be careful not to base the timing of deductions on when the amounts are transmitted.  

Likewise, the employer may not take a tax deduction when a forfeiture occurs. Rather, deductions will arise when benefits are provided, or amounts are applied against permissible administrative expenses. The timing of an employer’s deduction should not be confused with its accrual of liability from a financial accounting standpoint. For financial accounting purposes, the employer’s liability for health FSA benefits accrues as of the first day of the coverage period (e.g., the plan year), due to the application of the uniform coverage rule. For DCAPs, the liability accrues when the salary reductions occur.  

Self-insured medical benefits are governed by similar rules. If not paid from a trust, an accrual-basis taxpayer can deduct them in the year in which the expenses are incurred, even if paid in a later year. In contrast, a cash-basis taxpayer would deduct only when the expenses are paid. Likewise, premiums for insured benefits are deductible when accrued or paid, depending on whether the employer is an accrual-basis or cash-basis taxpayer. The deduction rules for a self-insured health plan that pays benefits from a trust or other “welfare benefit fund” are more complicated and are subject to limitations to prevent excess prefunding.

Certain entities that do not pay corporate taxes, such as governmental employers and nonprofits, can sponsor cafeteria plans without worrying about deductions as such, although these entities may recognize the costs of their plans on a similar accrual or cash basis.

Source: Thomson Reuters

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