Guest rbk08 Posted December 3, 2008 Share Posted December 3, 2008 The maximum election amount for Dependent Care is $5000. I will spend $5000 on daycare in about 4 months. Our FSA plan provider says that I still have to make the contributions spread out over our regular 26-week pay schedule. This means that I will have to deduct approximately $192 per pay check for the entire year and have to wait the year to fully reimburse myself for the expenses. While this is not such a big deal (I can get reimbursements throughout the year), I would rather take more out of my paycheck early on ($625 per paycheck for 8 pay periods) so I can get it out of the way. I am on hold now with the IRS to see what they have to say about it. Is this something that is a regulation for everyone, or is it our plan provider's rule? Any thoughts? Thanks. Link to comment Share on other sites More sharing options...
QDROphile Posted December 3, 2008 Share Posted December 3, 2008 Plan provider's rule. Link to comment Share on other sites More sharing options...
Guest Eric. Posted December 3, 2008 Share Posted December 3, 2008 The maximum election amount for Dependent Care is $5000.I will spend $5000 on daycare in about 4 months. Our FSA plan provider says that I still have to make the contributions spread out over our regular 26-week pay schedule. This means that I will have to deduct approximately $192 per pay check for the entire year and have to wait the year to fully reimburse myself for the expenses. While this is not such a big deal (I can get reimbursements throughout the year), I would rather take more out of my paycheck early on ($625 per paycheck for 8 pay periods) so I can get it out of the way. I am on hold now with the IRS to see what they have to say about it. Is this something that is a regulation for everyone, or is it our plan provider's rule? Any thoughts? Thanks. As QDROphile replied - This is the employer's rule (and is typical). Realistically, it is likely arrived at by the cost-effectiveness of setting up one system that will cover the majority (because some employees may take the whole year to use their account). But, I think you will find with your IRS inquiry that there is nothing compelling your employer to accelerate your PR deductions to accomodate the timing of your reimbursable expenses. Link to comment Share on other sites More sharing options...
LRDG Posted December 3, 2008 Share Posted December 3, 2008 IRS addressed this specific contribution/funding question many years ago and stated that contributions/funding and corresponding payroll deductions can not be established for only those periods during which participant expenses are incurred. For instance in the case of an employee's one time payment, or service/billing over 2 months of a 12 month plan year, contribution/funding can not be set up as a one time deduction or for only those periods that correspond to the partial plan year service/billing period. Dependent care FSA contributions/funding versus the period during the year that higher expense and more service are provided, such as summer day care or winter break for school age children, has been inherrent since the inception of DCFSAs. The funding rule applies to medical FSAs as well. Link to comment Share on other sites More sharing options...
Guest rbk08 Posted December 3, 2008 Share Posted December 3, 2008 LRDG - I can see where they are coming from, but the difference between a medical FSA and dependent care FSA is that the medical funds are available for use on January 1 - so you can make your purchases and get reimbursed right away -- but the dependent care funds are only available after you make the contribution. I don't have a problem with that in general; however, it would be nice to have some flexibility in when you can make the contributions -- like you can with an HSA. It is frustrating that you can front-load other tax benefit programs, just not this particular one. Essentially, you have to spend a lot of time and energy putting in small claims all along so that you can make up for the $192 shortage in your paycheck. Or, if you choose to wait and only put in one or two claims during the year, you are then paying your regular daycare expenses and contributing the $192 for the FSA at the same time. Not everyone can afford to do that. It would be helpful if they would either up the maximum or give people some wiggle room on the contribution schedule. On another note (and this differs from the answers I have received here), The IRS told me that it is because once you elect to make a deduction from your paycheck, that deduction will remain the same through the year unless you have a qualifying life change (birth of a child, marriage, etc.) even no matter what -- even after you reach the $5000 maximum. This seems to differ from contributions to a retirement plan, where the contributions would stop once you reached the maximum. The person I spoke with said that the FSA contributions would continue and would be subject to income tax. Our payroll dept. does not have a problem with stopping the deduction if it was within IRS guidelines, but it seems that it is not allowed. There are so many different rules that apply to the various plans! Link to comment Share on other sites More sharing options...
QDROphile Posted December 3, 2008 Share Posted December 3, 2008 I think you can design a plan that allows front loading up to the limit. That does not change the coverage period. It is simpler to have everything falling to uniform lock step with the normal way that cafeteria plans work with other benefits. While that may be enough justification to do it the simpler way, that is no reason to think that it is legally required to be done that way. Link to comment Share on other sites More sharing options...
Guest Eric. Posted December 3, 2008 Share Posted December 3, 2008 re: On another note (and this differs from the answers I have received here), The IRS told me that it is because once you elect to make a deduction from your paycheck, that deduction will remain the same through the year unless you have a qualifying life change (birth of a child, marriage, etc.) even no matter what -- even after you reach the $5000 maximum. This is correct, but I think you may have just slightly confused a fine nuance if you feel their answer differed: This is directly from IRS pub 969 When To Contribute At the beginning of the plan year, you must designate how much you want to contribute. Then, your employer will deduct amounts periodically (generally, every payday) in accordance with your annual election. You can change or revoke your election only if there is a change in your employment or family status that is specified in the Plan. So yes, you are not supposed to be a able to change or revoke your election unless you have a change of employment/family status ... but you will note that you elected at the beginning of the year how much to contribute based on a frequency your employer offered on the enrollment form (the IRS only says "periodically (generally, every payday)" NOT "must be on this or that schedule." Your original question sounded like it was questioning WHO set the pattern of payroll deductions. The moral of the story is that the election was made and the election is not intended to be revocable based on the ultimate pattern of cash flows after the fact. I don't think this really assisted you any further, but just wanted to add some clarification .... Link to comment Share on other sites More sharing options...
LRDG Posted December 3, 2008 Share Posted December 3, 2008 A plan may establish a unique benefit deduction period that results in periodic funding of benefits, for instance a plan with 52 pay frequencies may also establish monthly benefit contribution/funding/deduction fequencies. This would also be true for a plan that for it's unique business reasons establishes annual benefit contributions/funding/deductions frequencies. FSA plans may not establish contribution/funding for only a period during which a participant will incurr expenses, according to IRS regs. Early on when this was specifically adopted, it may have been to avoid the potential for violating the principals of constructive receipt. edited to add: IRS Publications such as IRS pub 969, I have considered for user general information purposes. I would not recommend relying on the user friendly language in such publications as a substitute for technical compliance standards an administrators would be expected to meet. Link to comment Share on other sites More sharing options...
Guest parrot87 Posted December 3, 2008 Share Posted December 3, 2008 A plan can specify ANY interval for payroll deduction, but that interval must be uniform for all employees. It can be one pay period or 100, but must be uniform for all participants. Link to comment Share on other sites More sharing options...
LRDG Posted December 3, 2008 Share Posted December 3, 2008 Organizations often establish multiple payroll schedules or frequencies, and multiple benefit contribution/funding/deduction schedules. It is not necessary that any payroll or benefit deduction schedule be uniform for all participants. If "front loading up to the limitit" results in a participant contributing for only a period during which a participant will insure expenses, it is likely the principles prohibiting the constructive receipt of benefits have been violated. Link to comment Share on other sites More sharing options...
Guest parrot87 Posted December 3, 2008 Share Posted December 3, 2008 Check page 82, section G of the 2009 cafeteria plan release. You can have different schedules for different FSA's, etc...but the question was just for dependent care FSA's Edit: you may want to start reading from page 95 as well. Personally, I don't care what you do, but I interpret what is written as you must have a uniform interval for WHEN the deductions are taken. As for the question of IF the amount of the deduction must be uniform throughout the year, I don't feel like looking into that. Of course I did not mean to say the amount of the deduction must be the same for all participants, only that the interval of time between deductions must be universal for all participants, as stated on page 82. IRC_125_Full_2009.pdf Link to comment Share on other sites More sharing options...
LRDG Posted December 3, 2008 Share Posted December 3, 2008 IRS regs do not require either payroll or benefit deduction schedules be uniform for all participants. The original question as I understand it does not relate to payroll or benefit contribution frequencies, but wether IRS regs allow an individual participant to 'coordinate' FSA benefit funding with FSA benefit reimbursement that would result in a much abreviated period, a situation IRS has previously stated is prohibited. Link to comment Share on other sites More sharing options...
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