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Adding Dependent Care mid year?


Guest ConnieLawson

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Guest ConnieLawson

Can an Employer/Sponsor add a Dependent Care benefit to their FSA, lets say in March 1, 2009? They have some employees that have a real need for this benefit and want to add it to their plan; their plan year begins January 1 and end December 31st....

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It sounds like the ER offers health flex accounts now, but would like to also add day care flex accounts mid-calendar plan year. The answer is yes. Plan documents would need to be amended to permit this. A special election would be conducted before the effective date for adding the day care flex accounts. These elections would only be for the balance of 2009. For 2010 and later years, the day care flex accounts would be elected alongside health flex accounts as part of the annual enrollment process.

John Simmons

johnsimmonslaw@gmail.com

Note to Readers: For you, I'm a stranger posting on a bulletin board. Posts here should not be given the same weight as personalized advice from a professional who knows or can learn all the facts of your situation.

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Keep in mind that DCFSA maximum amount reimbursable under the Sec. 129 plan may need to be adjusted for the partial plan year.

If the DCFSA is for 1/2 calander year, the IRS maximum $5,000 should be adjusted accordingly to maximum of $2,500. The primary reason is to avoid problem if plan allows $5,000 for July 01, through Dec. 31st expenses, individuals may claim January 01 through June 30th expenses when filing individual income tax returns, exceeding IRS max. of $5,000 annual amount allowed.

When DCFSA returns to full 12 month plan in 2010, the plan doc may need to be amended and enrollment materials reflect the full 12 month plan and maximum $5k.

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Why should the plan limit everyone to prevent someone from exceeding the limit becuase of particpation in another plan? The responsibility for observing the limit should be left to the individual. The others should not have to leave money on the table just to prevent the possibility that a limited number of people might be asleep.

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I would think that the annual limit is an individual taxpayer issue, and I'd hate to limit the Plan to $2,500 for the 6-month period and prevent an employee from using his/her permissible maximum for the year. The same argument could be made for always limiting DECAP FSA deferrals on a per-month basis so that those who leave in mid-year will hopefully not exceed their maximum limit after moving employment elsewhere, but that's really up to the employee to manage--just like 401(k) deferrals when switching jobs.

I see that QDROphile beat me to it . . . Great minds, you know . . .

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There is no IRS requirement for a DCFSA with a short plan year to establish pro-rata maximum for elections or benefit reimbursement.

There is onus or obligation on the plan sponsor establishing a 6 month plan that permits the IRS annual $5k maximum to be elected and reimbursed over a 6 month short plan year.

No money is 'left on the table'. Imposing a pro rated maximum in no way requires DCFSA participans to 'leave money on the table'. The balance not elected and claimed from the FSA can be claimed as a DC tax credit when filing individual tax return.

Plan sponsors may want to consider the pro-rated method for establishing DCFSA maximum for a short plan year to avoid confusion by participants and any liability, perceived or actual liability in the event their communication of IRS limits is lacking in any way. For instance participants enrolling later in the plan year may not get the level of enrollment material/info that's routinely available during annual open enrollment. But that's typically the case even when there isn't a short plan year involved.

Imposing a pro rated limit on IRS regulated maximum does not prevent the individual DCFSA participant from filing for DC tax credit for the balance of their child care expenses from individual income tax returns, and protects the plan sponsor from any perceived or actual liability.

Consider imposing a pro rated limit due diligence on the plan sponsor's part. The plan sponsor is protected, the dependent care participant is allowed to claim the balance when filing individual income return.

Litigation even when favorable to the plan sponsor, is avoidable and expensive.

On the other hand, there are a fair number of Dependent Care participants with annual DC expenses that exceed IRS $5k maximum. If not imposing pro rated limit on the DCFSA in any way benefits these individuals, and that benefit does not come at potential cost to plan sponsor, don't use the pro rated maximum.

The bottom line is the participant has the opportunity to claim difference between their DCFSA election/reimbursement and the $5k limit when filing individual tax return, with no liability on the plan sponsor by doing so.

There is onus or obligation on the plan sponsor, that permits the IRS annual $5k maximum to be elected and reimbursed over 6 month short plan year.

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No money is 'left on the table'. Imposing a pro rated maximum in no way requires DCFSA participans to 'leave money on the table'. The balance not elected and claimed from the FSA can be claimed as a DC tax credit when filing individual tax return.

* * * * *

The bottom line is the participant has the opportunity to claim difference between their DCFSA election/reimbursement and the $5k limit when filing individual tax return, with no liability on the plan sponsor by doing so.

There are EEs that do not qualify for the IRC 21 credit, but may use a day care flex account and benefit from it. Otherwise, why would the ER get involved in setting up and operating a day care flex account benefit if all EEs could benefit equally from the IRC 21 credit? If IRC 21 provided the same benefit for all EEs as a day care flex account option does, it would be much simpler for ERs not to offer that option and merely have the EEs claim it on their 1040s.

... there are a fair number of Dependent Care participants with annual DC expenses that exceed IRS $5k maximum.

Exactly the reason that an ER ought not to limit the $5k limit pro rata for the first, short plan year. There are EEs that do not qualify for the IRC 21 credit and have plenty of day care expenses during that short plan year to use the entire $5k. More prudent for the ER not to limit it pro rata.

Litigation even when favorable to the plan sponsor, is avoidable and expensive.

Expensive, yes. Avoidable by imposing a pro rata limit of the $5k limit? I don't think there's a litigation risk either way correlating to imposing a pro rata limit or not.

There is onus or obligation on the plan sponsor, that permits the IRS annual $5k maximum to be elected and reimbursed over 6 month short plan year.

I don't see how giving the EEs that do not qualify for the IRC 21 credit the full $5k opportunity for tax savings from just the short plan year places any onus or obligation on the plan sponsor.

John Simmons

johnsimmonslaw@gmail.com

Note to Readers: For you, I'm a stranger posting on a bulletin board. Posts here should not be given the same weight as personalized advice from a professional who knows or can learn all the facts of your situation.

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"There are EEs that do not qualify for the IRC 21 credit, but may use a day care flex account and benefit from it."

Who are these EEs? It's unlikely if not impossible for someone who does not qualify under Sec. 21 to qualify under a Sec. 129 plan.

"Otherwise, why would the ER get involved in setting up and operating a day care flex account benefit if all EEs could benefit equally from the IRC 21 credit?"

The ER becomes involved because under Sec. 129 the ER receives FICA payroll tax reduction/benefit that the ER does not receive the benefit of under Sec. 21.

"If IRC 21 provided the same benefit for all EEs as a day care flex account option does, it would be much simpler for ERs not to offer that option and merely have the EEs claim it on their 1040s."

I have no clue who said IRS code sec. 21 provides the same benefit for all EEs as a DCFSA option. When and if I have commented, it was to make clear that Sec. 129 is more benefitial in terms of providing a greater tax benefit, particularly for those in higher tax bracket. The exclusion from income is more benefitial, produces more value than the income tax credit. Lower paid EEs benefit more under Sec. 21, while higher paid EEs benefit more under Sec. 129. The break even is for those earning approx. $25k, with one dependent and DC expenses in excess of the $3k limit under Sec. 21.

Who are these individuals who qualify for Sec. 129 dependent care expenses but do not qualify under Sec. 21 for the dependent care tax credit?

Sec. 129 may be more benefitial for those in higher tax bracket, but as far as I am aware, it is simply not ture that there are individuals who do not qualify under Sec. 21, but will qualify under a Sec. 129.

It's unlikely that anyone who does not qualify under Sec. 21 will qualify under a Sec. 129 plan.

"Exactly the reason that an ER ought not to limit the $5k limit pro rata for the first, short plan year. There are EEs that do not qualify for the IRC 21 credit and have plenty of day care expenses during that short plan year to use the entire $5k. More prudent for the ER not to limit it pro rata."

Again, it's simply not accurate that there are EEs who qualify under Sec. 129, who do not qualify under Sec. 21. I'd like to know who these individuals are, because as far as I'm aware that statement is untrue.

If you can provide a convincing arugment or justification for ER/plan sponsor to reimburse in 6 mons what IRS only allows over 12 months, I might be persuaded that it's indeed a great idea. The obvious advantage of due dillegence by imposing the pro rate max is, well, obvious.

The potential for the ER/plan sponsor to 'expose' the plan to ethicaly challenged EEs or honest EE error, that it's possible will be explained to IRS auditors by the short plan year allowing $5k reimbursed in the short 6 mo. plan year, caused EE confusion, or the possibility of an actual oversight by the ER. It may be just too tempting for some EE who feel they won't get enough with Sec. 21 tax credit or they will lose out if they claim balance of the DC expenses as a DC credit under Sec. 21.

I've made it clear I do not believe there is IRS requirement for the partial plan year to impose a pro rata maximum, but as I've also said, doing so is due diligence, particularly when there is the possibility for EEs to claim the difference under Sec. 21.

The temptation for some EEs to get the most they can get away with pushing legal bounds, at the expense of the ER/Plan Sponsor. It may be in the ERs interest to minimize that opportunity and inconvenience caused when ethically challanged EE is audited and points to the short plan year to explain away their 'confusion' for claiming $7-8k because of 6 month DCFSA. Not to mention the flawless procedure open enrollment process is, we know there's never an error, never one ER could be responsible for communicating tax issues under limited time span to distracted EE at best, confused EEs, typical.

I see no credible reason or not a strong enough reason to not impose a pro rata max for a short DCFSA plan year. That is only my opinion, not an IRS requirement.

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Perhaps 'qualifying' was not the right term.

There are many for whom the income tax/FICA tax free benefit of running the dollars through a day care flex will far exceed the IRC 21 credit. For example, the credit for those earning $45,000 or more is 20% of the day care paid. If run through a day care flex, the person gets 15% federal tax, 7.65% employee's share of FICA, and whatever his or her state income tax rate is combined.

For those in higher marginal brackets, the tax savings from the day care flex vis-a-vis the IRC 21 credit is more profound.

Why would you want to deny someone this extra savings by pro rating the $5k for a short plan year?

John Simmons

johnsimmonslaw@gmail.com

Note to Readers: For you, I'm a stranger posting on a bulletin board. Posts here should not be given the same weight as personalized advice from a professional who knows or can learn all the facts of your situation.

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I'll agree to disagree with you on the due dillegence of a plan sponsor imposing a pro rated maximum on a DCFSA with a short plan year and leave it at that.

I do think it's interesting how income limits and tax rates I quoted appear in your post to argue your point in support of incorrect statments contained in your comments, more than the incorrect use of terminolgy.

I appreciate the exchange of information and a fair argument on a discussion board, the advantages of such debates and exchange of info improves all of our understanding. But I'm surprised when an adult, professional lowers themselfes by presenting info supplied by others without acknowledgment, presenting it as their own to support an argument that is based on a false statement, to begin with.

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  • 2 weeks later...
Guest Mr. Kite

With a pro-rated first year amount, you would probably have as much potential for litigation as if you used the full amount. If $2500 is the limit, some participants will get it in their heads that the limit will always be $2500 and will only sign up for that much next year, and get angry when they find out they were "misled."

And even with a $2500 limit in the first year, you may have folks who have already paid the bulk of their DC expenses (for example, summer camps) and will still have "money on the table" by the end of the year.

Perhaps the plan could have a $5,000 limit as well as a "grace period" whereby the amount left at the end of the first year will be available to reimburse expenses incurred at the beginning of the second year.

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