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$5,000 limit on dependent care reimbursements for non-calendar plan ye


Guest Jeff Kropp
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Guest Jeff Kropp

If a client has a short plan year or a plan year other than a tax year, how should the $5,000 tax year limitation on the exclusion of dependent care assistance reimburements be handled in terms of administering the plan?

For example, if an employer adopts a plan year beginning July 1, and an employee may elect to defer $5,000 for the full plan year, it is possible that such employee will submit claims in excess of $5,000 in the next taxable year. At a minimum, I would assume that the employer, if not the plan administrator, would be required to monitor the limits on a tax year basis, due to its withholding obligations on excess amounts. Any thoughts?

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Pro-rate the $5,000 as a maximum monthly number of $416.66 in the plan documents, so regardless of the 12 month time-period you are looking at the maximum benefit will not exceed $5,000 regardless of the claims submitted.

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The limitation is for $5,000 in a calendar year not $416.66 per month. In a short plan year or in a non calendar plan year or when two plans are involved, the limitation is still a combined $5,000. The employer and administrator must work together to ensure that the limits are maintained.

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$5,000 divided by 12 is $416.66 and one possible way to address the issue of the required tracking is to craft the benefit as described above. Thus no one regardless of plan year ever exceeds the limit for a calandar year.

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The $5,000 limit is not pro-rated if the plan is not in effect for the full year. Thus, you could prorate it, if you want to punish your employees, but not many do. Of course, you need to warn the employees that the $5,000 is the total for the entire year, even if they were employed by more than one employer during the year. But I see absolutely no reason to prorate the $5,000 if the person has not been covered by another dependent care assistance plan during the year.

Kirk Maldonado

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I have to step in and support Lisa. The regulations state the legal maximum benefits and limits. An employer could set up a Dependent care account that had a maximum of $3,000 per year or $416.66 per month. You could even design a plan that only allowed expenses for dependents under the age of six.The regulations state the most you can allow but they don't force you to go to the limit. I know that most employers want to offer the maximum available under the law, but Lisa's concept still allows an employee the $5,000 maximum in all plan years except the first.As a practical matter most people pay their day care expenses weekly or bi-weekly not annually in a lump sum.

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Your dependent care costs must be a lot lower than where I live (in California). It's not hard to go through $5,000 in a whole lot less than 12 months. My feeling is that employees should be allowed to put in the maximum that the law allows, if they have that much in expenses. I don't understand why you would force your employees to pay costs with after-tax dollars when they could pay them with pre-tax dollars. Remember that the employer also saves money too, because the employer does not have to pay employment taxes on the amounts that the employees contribute to the cafeteria plan. I'm perplexed as to why people would want to voluntarily pay more taxes than they have to.

Kirk Maldonado

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Guest Jeff Kropp

We agreed with Kirk, and allowed employees to defer the full $5,000 in a calendar year, including the calendar year that includes the short plan year.

I left out of my facts that the employer switched from a July 1 to June 30 plan year to a February 1 to January 30 plan year (thus the 1999 July-February short plan year). So, the employer has to monitor the 1999 calendar year and subsequent plan years anyways, regardless of the February plan year. The plan booklet will also be updated to put employees on notice. Thanks for the help.

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The employer, plan sponsor, also has a responsibility to insure complaince with the IRC and the regulations. From a TPA's prespective, the approach I detailed helps insure that both the employee and employer are protected from inadvertantly violating the maximum, as well as addressing the issue of discrimination, especially with the short or off calendar plan years or periods of participation less than a full year, without creating an additional administrative burden for the employer and employee. It also helps insure the expenses are incurred during the period of coverage and the plan will pass the IRS audits on DCA benefits. It is not about punishing the employees, it is about insuring complaince without resorting the extraordinary efforts to do so. Obviously, there is more than one appropriate manner to deal with the adminstration of this benefit, any will work as long as the requirements of the IRC and governing regulations are complied with.

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I'm feeling a lot positive waves in this chat room. In the short time that I have been tuning in I'v noticed that everyone is guilty, myself included, of being vague or incomplete in our questions and answers. I don't know about the rest of you, but typing is such a burden for a two fingered typist like myself that often I pass on commenting on a question because the proper answer would take too long to type out.

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Lisa, I agree that it is easier to administer the plan if you impose a monthly limit of 416.66. From the employees viewpoint that may be a rather draconian way to structure the plan. It is not uncommen to have employees paying 8 to 10 thousand dollars a year in dependent care.

Joe, The limits would not only have an affect on the first year, it would also impact any employee that had a family status change during the year.

With our plan, we use a $5,000 annual limit. We communicate with the employees in our plan doccument, with our handouts showing how the plan operates and one on one with each enrollee. When we went to a TPA this year they were extremely happy that we used the annual limit. In their "how to use the plan" information they are also very specific about the limits of the plan.

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