Dcfsa

[Guest chaug]

An employee elects to enroll in the DCFSA during Annual Enrollment. Deductions begin on 1/1/02. At the time of the election, she was pregnant with her first child. She has now decided to terminate employment and stay home with her baby. She has requested a refund of the amount deducted to date.

Is she eligible to participate in the plan prior to the birth of the child? Does the baby have to be born before deductions can begin?

Our plan does not specifically state that you can not contribute to the plan if you don't have a child.

[papogi]

I hate it when employees do this. The birth of the child is a family status change, so the DCFSA should have just begun then. I know the employee wants the total election split over more paychecks so that the take home pay is not destroyed after the baby, but these are the things you run into. Employers should not allow DCFSA's without qualifying dependents already in place. The IRS has said that a mistake such as electing a DCFSA when you don't even have a qualifying dependent can be rectified. Their intent, however, is that this is only OK because it was a mistake (i.e., the employee meant to elect a HCFSA or the election documentation infers that you have to elect every benefit). This case is not a mistake. This employee is changing her mind. While I understand her predicament, there's nothing she can do.

[jpod]

I agree with papogi unless the plan says that you can't participate unless you have a "qualifying individual," in which case participation was a "mistake." Probably not there explicitly, but someone should take a look.

[KIP KRAUS]

If the mistake was the Plan Administrator’s mistake, why not refund the as taxable income? The Plan Administrator has the obligation to determine eligibility to participate in any employee welfare plan. In my opinion if they allowed an ineligible employee to participate they should rectify their mistake. In this case I would refund the money as taxable income.

While the Plan Document may not specifically state that a person must have a qualified dependent it should have language that addresses eligibility to participate and what the definition of a qualified dependent is. If so, this person did not meet the qualifications, because she had no qualified dependent.

[jpod]

Don't get me wrong; I wouldn't hold out too much hope that the plan document permits participation only by those employees who have qualifying individuals as family members. In fact, I would never think of writing a DCAP plan document that way - I wouldn't want my employer-client to have to police those matters.

[papogi]

If you now state that this employee should have never had the DCFSA, you might be able to get away with this if you can show that you have applied a similar policy in the past. For instance, say this employee did not terminate, and this never came to light. You would have taken payroll deductions, and built up a DC balance ready to use before the baby was ever born. Once the baby is born, do you have claims procedures in place which would have prevented reimbursements from the balance sitting in the account, and only reimburse amounts deducted from payroll after the birth? Probably not. If you have made no effort in the past to enforce this “eligibility at the time of payroll deductions” idea, then I think it’s risky to hold up the never-used provision.

In principle, I agree with the idea that she never should have been allowed to start the DCFSA. When an employee elects Employee plus Spouse medical coverage, the HR department is sure to get information about the spouse before proceeding. Similarly, if an employee elects a DCFSA, the HR department should get information about the dependent. If the employee cannot produce information, then there should not be any DCFSA. This should start, but it should start at the next open enrollment, not in the middle of this year just to help an employee change her mind.

[KIP KRAUS]

Excellent point papogi. In addition, isn’t it correct that the Plan Administrator has the obligation to obtain the employer ID or social security number of the dependent childcare provider? I believe it is the Plan Administrator’s obligation to police the plan.

[Guest chaug]

Thanks for all of your responses. Our plan administrator has recommended that we refund the entire amount deducted, as she was not eligible for enrollment until the baby was born.