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Divorced parents: how to handle child care FSA


Guest aearle

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Guest aearle

An employee is divorced. She and her husband have a son, who (according to the divorce agreement) each gets to claim as a dependent on their taxes returns in alternating years. The employee's company has an off-calendar year plan (8/1/02-7/31/03). So for part of the plan year, 8/1/02-12/31/02, she will not be claiming the son as her tax dependent -- BUT she does pay every month of every year towards his daycare and he lives with her primarily.

1) Is using the FSA based on custody, tax dependent status, who pays, or where the child lives?? Or a combination of these 4 things?

2) Secondly, IF she can't claim reimbursement for the remainder of 2002, then she does not want to have money taken out of her paycheck through the DCFSA until January. It is my understanding that she has to have the money taken out of her check evenly across the entire plan year. Or, can she wait until 1/1 to join the FSA and only have money taken out for the remainder of the plan year?

She is very frustrated that she is locked into a plan year that does not coincide with the calendar year -- plus she has this funky tax dependent situation. Help!!

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Since the child lives with the mom for more days than the dad, she can open the DCSA and be reimbursed for expenses incurred by her. It does not matter who gets the exemption. The father will not be able to open a DCSA or take any child care credit on his taxes as long as the child primarily lives with the mom.

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Guest aearle

It turns out I was a bit wrong. The scenario is that each parent has the child living with him/her exactly half of the year. They each pay the same amount toward the child's day care. And the divorce agreement gives each parent tax exemption in alternating years. Everything is right down the middle. Who gets to open the DCSA? She does not want to contribute to the DCSA for part of the plan year in which she can't claim reimbursements. Thanks!!

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According to the IRS, only the custodial parent can have a DCSA. Who gets the exemption does not matter. The child must live with one parent for more days than the other since there is an odd number of days in a year. Even if they have to break it down into hours, only one parent can be the custodial parent. If it turns out to be her, then she can open a DCSA for the amount she expects to pay over the year (even though the expenses are only incurred over half the year). She will then get it all back by the end of the year. I see no way that she won't have to contribute to the account through the whole year. As long as she is the custodial parent for the child in the eyes of the IRS, no change in eligibility occurs when the child goes to live with the father, so the DCSA must continue through the entire year.

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The law is the law but this seems grossly unfair. I've asked this same question for one of my emps and a friend of mine has the same issue. Neither of them were happy with the information I shared with them as it is not equitable.

I realize this is a bit out of the realm of this board, but does anyone know how to go about getting this changed?

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I'm not sure how to get it changed (the obvious choice is to write your congressman, but than can be throwing something into an abyss), but I can give you what is probably the reasoning for the rule. A HCFSA works differently than a DCSA. Since there is no Federal dollar limit for a HCFSA like there is for a DCSA ($5000), the IRS doesn't really care how much tax protection you received from your employer, and how much you were able to write off on Schedule A. There really is no limit. For this reason, a divorced couple can claim medical expenses for a qualified dependent under IRC Section 152 for the same dependent, even though only one parent gets the exemption. In a way, there's very little for the IRS to police. For DCSA's, the IRS must be concerned with the $5000 limit. Assume that each parent files single after a divorce. They no longer even list the SSN of the former spouse on their 1040. Without that cross-reference, it's extremely difficult for the IRS to be sure that each parent does not each have a $5000 account on the child. They can cross reference based on the qualified individual listed before completing From 2441, but that's not on the front of the 1040 where they really want to see it.

It does seem unfair, I agree. And it's also frustrating that it seems that the only reason the IRS is not fair is because of system limitations. I mean, there doesn't seem to be any real reason the IRS would not want each parent to be able to have tax protection for otherwise eligible expenses.

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You are a wealth of knowledge! Thanks for the information. I'll pass this on so my emp/friend at least can understand the reasoning.

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Just one more note, writing your senator or congressperson is still a good idea and one to pass on to your employees. So many people view this as "tossing something into the abyss", that each letter, email and call congress actually does receive is weighted, counted as representing sometimes thousands of voters depending on the size of the district. The only way our elected officals know what we are thinking and what we believe is important, is to tell them and hold them accountable for their actions.

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