Dependent Care Reimbursement vs. Termination of Employment

[Guest LWilson]

Our client has a Cafeteria Plan which includes a Dependent Care Reimbursement Account. (I only work with retirement plans, so I am unfamiliar with the ins and outs of Caf Plans).

An employee's position is being phased out, and she will be terminated as of June 30, 2002.

In the meantime, not knowing that her job would be non-existent halfway through the year, this employee elected to have the maximum allowable withheld from her pay for Dependent Care Reimbursement, with the knowledge that she is going to have spent every penny by the end of the year.

The TPA has informed this employee that once her employment has ended with the employer, she will no longer be allowed (by law) to submit child care receipts to recover any additional child care expenses withheld, and still sitting in the account.

In other words, although she will still have child care expenses related to the plan year, and there is still money sitting in that reimbursement account in her name, she is not permitted to access that money once her employment ends, regardless of any ongoing child care expenses during the plan year . . .

Is this correct?

Are there any legal mechanisms for bypassing the loss of this money, for instance, just putting any remaining amounts back into her paycheck, and taxing it as part of her ordinary income for the plan year?

Any thoughts?

[papogi]

Based on how the flex plan doc is written for the employer, the TPA is probably correct. Some flex plans allow employees to spend down the amount already contributed into a DCFSA even after the term date. This is strongly not recommended. When the employee terminates, they cease participation in the plan. Since DCFSA's are not subject to any COBRA/continuation rights, the account should terminate. The employee can only access the funds deducted from his/her paycheck up to the termination date, and only for dates of service before the termination date. This is the risk the employee takes by electing the account.

[SLuskin]

Right, and in addition to that, the daycare must be employment related. Once the employment has terminated, it becomes difficult to determine if the terminee has obtained and retained new qualifying employment.

Our plans do not permit daycare reimbursements for days after termination. We do still have a grace period, however.

[Guest LWilson]

The document specifically states in the Termination of Employment Section: "With regard to the DCAP . . . such Participant may submit claims for employment related Dependent Care Expense reimbursements for the remainder of the Plan Year in which such termination occurs, based on the level of his DCA Account as of his date of termination."

I read that to say, as long as the money's there, and the recepts you submit apply to the plan year, you can submit receipts for reimbursement.

I'm not going to split hairs over the argument of whether or not the person is sending their child to daycare due to employment reasons . . . daycare is expensive, and chances are this person is going to continue to send their child to the center because they are either working or looking for work . . .

My concern is that the TPA is balking over continuing to reimburse this person, and there doesn't appear to be any document or code related reason why she can't continue to submit her receipts for reimbursement.

I guess the question is, who's missing the point, me or the TPA?

[papogi]

The TPA. In defense of them, they are generalizing 125 rules and enforcing them how they are applied normally. None of my clients have the provision which allows terminated employees to spend down their accounts. The regulations do not specifically disallow the practice. It's not illegal, and since your plan doc has it in there, and your TPA is hired to administer your plan, they'll have to allow it.