Section 129 Dependent Care (DCAP) NDT Question

[dabram09]

Hi,

similar to question below. Small headcount plan where only HCE's actually made DCAP contributions. Company does employ NHCE's. Not worried about 25% concentration test. Would this plan fail 55% Average Benefits Test just because zero of its NHCE's make contributions? I would also appreciate a source if anyone has one.

 

[Brian Gilmore]

Yes, they would fail the 55% average benefits test because they would be at 0%.  Unfortunately, there is no way to pass the nondiscrimination testing requirements for the dependent care FSA if only HCEs participate.  The employees’ remaining contributions in the FSA will simply be returned as taxable compensation.  Any amounts already reimbursed will be recharacterized as taxable income.  This will effectively eliminate the dependent care FSA for that plan year.

Keep in mind that they may be able to take advantage of the top-paid group (top 20%) election to try to get at least one of the HCEs to move into non-HCE status.  Then even if they're still failing, at least they would be able to preserve at least some of the HCE tax-advantaged dependent care FSA benefits.

• Details and cites here: https://www.newfront.com/blog/the-dependent-care-fsa-average-benefits-test