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Life change event - pregnancy or actual birth?


Guest A. Rostosky

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Guest A. Rostosky

When an employee is pregnant, can withholding be done for the dependent care plan, or can it only be done once the child is born?

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Only upon birth of the child. As of right now, she doesn't have a child (I assume), so she wouldn't qualify for the plan.

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  • 2 years later...

Taking this a step further, assume the mother has "spent" her health FSA for the year, but elects to increase the FSA effective upon the birth of the child and elects to contribute an additional $1,000 to the FSA for the remainder of the year.

1) Can the additional $1,000 be used to reimburse expenses of the mother, or must it be used for expenses of the new child? Can it only be used to reimburse expenses incurred after the birth of the child?

I don't believe that the $1,000 could be used, for example, to pay for the mother's laser eye correction prior to the birth of the child. Correct?

2) Assuming the $1,000 can only be spent on the child's expenses, could it be used to reimburse a $1,000 copay for the delivery? In other words, is the delivery an expense of the mother, the child, or both?

It seems to me that the delivery expenses are attributable to both the mother and child, but would the IRS require proration and only allow half of the copay to be reimbursed from the additional FSA amount elected due to the status change?

We may be splitting hairs, but we'd like to avoid splitting the baby <_<

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Guest jashendo

FAQ --

You are assuming that the mother is permitted to elect an "additional $1000". I agree that the birth would constitute a "change in family status", but how would the additional election satisfy the consistency rule? That is, if the FSA has, say, an annual maximum of $5000, and the mother had previously elected (and has now used up), say, $4000, why would she have to right to increase her election to $5000 just becasue she had the child? She could have elected $5000 in the first place, without the child, but chose not to do so.

On the other hand, if the FSA is structured in such a way that employees without children are limited to, say, $4000, while employees with children have a $5000 limit, that would be a different story. But I've never seen one like that; have you?

If you had such a plan, the utilization of the "extra $1000" would also have to be governed by the terms of the plan. So if the plan allowed (or at least didn't prohibit) the full amount to be used to reimbursed any family member's expenses, then the $1000 could be applied to any post-delivery eligible expenses -- mother or child.

For what it is worth, I cannot cite authority at the moment but I do not believe that delivery can be treated as an expense of the child, except for, e.g., attending pediatrician, incubator, nursery and such expenses. The OB-GYN, labor/delivery room, medications, etc. would, I believe, be solely the mother's expense.

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The birth of the child would be a change in status that could trigger a change in elections. However, you have to look at the plan to see whether it permits a change in elections due to a change in status.

As pointed out, if the plan permits the increase in the election, then it's an increase to the health FSA. The health FSA can generally reimburse any medical expenses of the family. Thus, it doesn't matter whether the expenses are for the mother or the child.

As a practical matter, some plans permit increases in the election but no decreases. With a decrease in elections, the employer would have a greater risk of loss. There's no guidance on how to handle an increase, but presumably, if the benefit is increased by say $1,000 in the last 2 months of the year, the individual would need to contribute an extra $500 a month.

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Guest dbutton

The FSA election is an annual election used for any member of the family. How would you police using it only for the child's expenses? (and why spend the admin dollars trying to figure it out).

I can easily understand why someone would elect $4,000 at the beginning of the plan year, get pregnant, and then increase it by as much as they can at the time of the birth. Kids are EXPENSIVE! The delivery, dr visits, prescriptions - all are added expenses that the mother may not have known about at the time she made the FSA election - she wouldn't have put in the max if she hadn't planned on spending the max. Now she's having a child and knows her expenses will increase.

Do we even care if she's spending it on lasix? Or gall bladder surgery? Or aspirin? Why do we care? If it's an eligible expense it's an eligible expense.

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jashendo - On what do you base your conclusion that the birth of a child (addition of a dependent) does not meet the consistency rule to permit an increase for the medical FSA?

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The plan at issue allows all election changes permitted under applicable regulations. I agree with gr8 that the birth would be a change in status (i.e. increase in the number of dependents) that would allow an increase in the FSA election. Treas. Reg. 1.125-4©(4), Examples 1 and 5 provide similar situations involving a new marriage and a spouse's loss of a job. The examples indicate that there is a change in status that would allow an increase in the health FSA election when the spouse is added. EBIA has helpful information in its Cafeteria Plan guidebook. Page 361 of the EBIA guidebook states the FSA result is the same for the birth of a child (although no authority is cited).

I have not found anything requiring that the additional amount elected be reimbursed only for expenses relating to the new dependent. I think I agree with dbutton that such a requirement does not exist. There is an analogy in the tag-along rule. At p. 539 of their guidebook, EBIA notes that IRS officials have stated that it would be consistent to add dependents who were previously eligible for coverage whenever a change in status event results in eligibility for any other dependent. This supports an argument that the benefits of the change in status do not have to flow exclusively to the dependent who triggered the change in status.

However, EBIA notes at p. 601 of its guidebook that an IRS official has informally stated that a change in status election triggers a NEW COVERAGE PERIOD. Under EBIA's example, the IRS view would be that if a participant elects $2400 as his FSA election ($200/mo.) but changes to $900 ($100/mo) after 3 months, the participant could be reimbursed for $2,400 of expenses in the first 3 months AND $900 of expenses for the last 9 months, for a total of $3,300 over 12 months, even though he only paid $1,500 in premiums.

EBIA states that the same official noted that in the absence of formal guidance, a blending approach may also be allowed. The plan might allow $2,400 to be reimbursed for the first 3 months, but any expenses reimbursed during such period would be deducted from the $1,500 paid over the course of the year in determining the limit for the last 9 months. For example, if a $900 expense is submitted in January, the employee would have $600 ($1,500 less $900) to apply towards expenses in April through December, the period after the election change.

As an employer, I like the blending approach much better. Our situation involves an increase in the election, of course, but it does appear that the participant should not be reimbursed for expenses incurred before the change in status that exceed her original election (say $4,000). However, all participants covered under the FSA should have access to the additional $1,000 as of the date of the birth.

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