Qualifying Event Controls

[Guest Elijah]

When we enrolled in the Dependant Care plan my wife was enrolled as a full-time student during the day. Not soon after was she forced to drop and wait expectantly for an immediate opening, forcing us to have our children within the care provider - or loose the spots for the year, which would not allow her to resume college as needed.

Recently she received noticed that she would be accepted back as a full-time student, but in the evenings, meaning she is able to care for the children.

The qualifying event occured some time ago, however we are only able to exercise this option now. Are we able to request to drop the plan as of today, irrespective of the physical date of the possible qualifying event? In otherwords, is there a restriction stating that we had to claim the event in X-period of time from the event date, or are we able to exercise the event when or if needed?

The second trick question is: What in the world would be needed to support the qualifying event? We can easily provide the documentation supporting going BACK to college in a couple months, however the inverse I am completely unaware of what is needed. Can you please help me?

[mroberts]

I don't really follow the events that you listed, nonetheless, changes due to a qualifying event need to be made within 31 days of that event. Therefore, it doesn't look like you're going to be able to do anything.

[Kirk Maldonado]

MRoberts:

What is the source of your 31-day rule? My recollection is that the IRS said in the preamble to one of the set of Section 125 plan regulations that it was not imposing any such deadline.

[Sandra Pearce]

I agree with Kirk that there is no IRS rule which requires notices within a certain period of time; however, most plans have their own specified time periods for notification. All changes must be made prospectively. Also, when the situation changed and the spouse was no longer in school full time didn't the ability to tax a tax deduction, either on a 1040 or in a 125 plan, cease?

[Guest Elijah]

Thank you for your help, everyone. My difficulty is knowing where I can access (on the net?) the documents you all are superb at referencing, and I thank you!

I have asked my own payroll specifics, such as what specifically is required from me in the form of documentation to support the qualifying event, time frames, etc ~ and it appears they are just as in the dark and me.

Please, if you could provide me a specific link to follow so that I could begin my research I would be MOST Grateful!

Thank you so much for you time!!

[mroberts]

My source is just about every insurance contract ever written.

[papogi]

One good place for IRS regs is www.125plan.com. You can find most of the 125 regs and subsequent updates.

Also, www.changeofstatus.com provides a decent flow chart for 125 plan election changes. A couple of their opinions are debateable, I think, but it's very useful.

It's true that the IRS does not specify a time frame for all status change election changes. In order to comply with the consistency rules, a 31 day window is typically written into each 125 plan. It doesn't have to be 31 days, but it does seem to be the industry standard. They will have to check their document.

[PhilB]

I have a situation similar to this I am grappling with right now: Our employee's spouse lost his job on 4/24/02 and they called us on 5/8/02 to let us know that they wanted the working spouse premium dropped (We charge an additional minimal premium if the spouse is employed and eligible for insurance through their own employer but takes our coverage instead). At that time, they did not say anything about making changes to their Dep Care Spending Account.

Per the employee, they kept the kids in daycare even though her husband was not working, but now it looks like her husband will be off of work for quite a while so now they want to take the kids out of daycare and the employee wants to know if they can drop the DCSA. They did call us within 30 days (as required by our plan) of the spouse losing his job to request that the working spouse premium be dropped, but they did not mention the DCSA at that time. Our plan stipulates that care must be provided to allow you and your spouse to work or look for work.

My question is, are we allowed to keep the employee enrolled in the DCSA if they are "not" BOTH working (which is normally one of the eligibility requirements)?

[Guest Elijah]

First - THANKS a Million for the awesome links

Reading 1.125-4 it appears that, since we are withdrawaling our children from the dependant care, under (f)(2)(IV) with respect to substancial changes in cost or, in context, loss/cancellation of services, we can simple request the qualifying event as of the effective date from removal from the care - based simply on the substancial change in cost (or absence of).

Am I reading this wrong?

[papogi]

Based on the regs in 125-4, this is a qualifying event which would allow you to drop the DCFSA. I would caution again that the time frame specified in the 125 plan doc (usually 31 days, but not always) should be adhered to. The reason that this is important is because the IRS only allows election changes on account of and corresponding to family status changes. They don't want employees to use "forgetting" as areason to add or drop accounts. I realize the circumstances surrounding your case, and they might be enough to stand up in the face of a rare IRS audit. Depending on specific wording in your employer's flex plan document, they may not be obligated to let you frop the account. Truth is, the day that your wife dropped from college and began awaiting a spot, you no longer qualified for the account and you should have notified HR to stop the account. If and when your wife went back to school, then the account could have started up again.

[Mary C]

You also need to refer to the plan document or summary plan description. Essentially what you are overlooking is that under regulations, daycare is only reimbursable in order to allow you and your spouse to work or attend school. When your spouse quit attending school, you became ineligible to receive reimbursement of your day care expenses and technically to participate in the plan. Our summary plan description and plan are written that the date of the qualifying event is the date you became ineligible for the plan, not the date you withdraw the children from daycare. Any changes as far as dropping the coverage or reducing the contribution to the coverage, under our plan, had to be made within 31 days of the event (when you became ineligible). My bet is that your plan may contain similar language.

[PhilB]

papogi and Mary -

Just so I am clear on what you are saying -

The 31 day notification rule (or in my situation, 30 day notification rule) should be adhered to even if as a result of the status change the employee and spouse no longer meet the eligibility criteria specified in the SPD (and the IRS)? In other words, even though both parents are no longer working (or looking for work and therefore do not meet the eligibility guidelines for our DCSA), they cannot drop the DCSA because they did not notify us within the 30 days stipulated by our plan?

I don't have a predetermined answer here, just trying to get opinions on another seemingly gray area in the regs - I am thinking in terms of the eligibility comment Sandra made above specifically.

[Mary C]

That is correct. If the parents do not notify the Plan Administrator in the time frame allowed, they cannot drop coverage. Further, any day care expenses incurred AFTER the date employment, attendance at school or looking for work stops is NOT reimbursable by the plan. (We allow ex-employees 90 days in which to submit expenses only up to the date of termination to claim reimbursement from our plan. Even if they get another job, we do not allow reimbursment from our plan for expenses incurred after termination because we cannot monitor whether they are really employed or not.) It does sound harsh, but these types of plans reduce taxable income and the IRS is harsh when it comes to trying to avoid taxes by incorrectly reducing or under-declaring your taxable income.

This is our company's and our ERISa attorney's interpretation.

[papogi]

The IRS has been somewhat wishy-washy on the subject. For instance, they have said that an employee can drop a DCFSA if they "elected it by mistake" and didn't even have a qualifying child. Theoretically, someone could elect the account knowing full well that they don't have a qualifying child just for purposes of reducing taxable income, thereby making them eligible for some other tax break which may be valuable to them. Modified adjusted gross income calculations usually put these sorts of deductions back into the income, but there's probably something out there that this would work for. If they then realize that they no longer need that other tax break and wish to drop the DCFSA, they could go in claiming this IRS exception. Either way, the case in question is not exactly like the one that the IRS outlined as a possible correction, so I agree with Mary on this.

[PhilB]

Interesting.......

Not sure I've seen it handled that way before, but I'm not really sure what other plans do in this type of situation. For example, my understanding of the allowable election changes for DCSA is that if a spouse commences employment, the employee could make or increase their DCSA election to reflect new eligiblity under the plan. Of course, plans don't have to allow any exceptions, but I'm not sure what the school of thought is on whether you can pick and choose among the allowable exceptions you accept into your plan.

In any event Mary, I'm curious how you handle this from an administrative standpoint. It sounds as though you term the DCSA as of the status change date to prevent an employee from submitting expenses incurred after the status change (and loss of eligibility for participation in the plan). But since you don't allow them to drop the plan (due to failure to notify you of the status change in the required time frame), do you continue to deduct monies on a pretax basis from the employee's paycheck?

I'm also curious about our responsibilty as a plan sponsor in this situation (just trying to cover all the bases here folks!). The employee called us within the 30 days stipulated by our plan to inform us her spouse was no longer employed, but did not request to drop the DCSA. Presumabaly this was because he is in a layoff situation and expected that he might be called back, but that hasn't happened thus far. They are now past the 30 days since the event, realize this may go longer than they thought, and now want to term the DCSA. Was it our responsibility as the plan sponsor or administrator to term the DCSA (due to lack of eligibility) or at least ask the employee at the time the employee called to inform us of the status change?

[papogi]

A 125 can pick and choose which family status changes it wishes to allow into the plan, but it must be in writing.

If an employee calls within the time frame and makes HR aware of the fact that his/her spouse is no longer employed, I think it is HR's responsibility to ask the proper questions if they are doing their job well, but I don't see anywhere that they are legally required to. Even though the employee did not ask specifically about the DCSA, HR should make that leap and think of any affected benefits. For instance, say an employee calls HR and says that his/her child graduated and is no longer a full time student, with no mention of actual benefits. You can bet that HR will talk to the employee about removing the child from the health coverage without even being asked. Flex benefits take a back seat, when they shouldn't.

At the same time, I don't think you could say this was an administrative error on your part and the employee should be able to drop the DCSA. If the employee asked to drop the DCSA and you didn't, that would be an administrative error.

[Sandra Pearce]

I agree with papogi that HR often could be more proactive and we absolutely think of the underlying benefit plans first and the 125 plan second. If a spouse terminates employment that does not mean that the spouse doesn't have other employment on the horizon or is not actively looking for employment. So in that case I don't know if I would have asked about a dependent day care account. I would allow the change prospectively after notification. I would not consider this an administrative error. Employees are given SPD's which they have some obligation to read and understand or question. I've had employees try to tell me that since they didn't read the SPD (were given one but didn't read it) they shouldn't be held to the filing requirements.

[PhilB]

Sandra -

Prospectively even though they inquired about dropping the DCSA after the 30 days had elapsed? Or do you mean you would have allowed them to drop it prospectively at the time they first called?

Our issue is that they didn't ask, we didn't ask, so nothing happened in regard to the benefit. Now they want out, but my gut reaction is to deny the request because I have a sense that they were hedging their bet, but it didn't work out the way they anticipated.

Assuming I'm right about that (and how could I ever know for certain), it really wouldn't be different from someone who anticipates having surgery and elects to participate in a HCSA, only to find later in the year that they cannot have the procedure performed. They would be stuck. The big difference here is that they can't use the money for anything else besides day care expenses.

[Sandra Pearce]

I would allow the change beginning the date of notification that the spouse was not looking for employment. Which is I guess what the employee is now telling you. The fact that the spouse lost a job does not mean that the spouse was not actively looking for employment (and the day care was still a valid 125 benefit). Our plan, right or wrong, does not have a 30 or 31 day notice requirement. So I would be letting the employee out of the election due to the termination of the spouse's employment.

[Guest Elijah]

Adding to the fray (sorry), it also appears that per 125 (f)(2)(iv) that there is actually an IRS stipulation that a qualifying event is also justified for "substancial" change in cost - interesting. Am I reading this wrong? "Substancial" becomes, itself, arbitrary. Specific to my scenario, my dependant care when from $400+ per month to $0 per month. What am I missing?

[papogi]

Elijah, you are correct. The cost decrease rule should allow you out of the DCSA as long as you notify HR of this change within the time frame alloted in your plan document. It won't help with the deductions taken previously, but it will help going forward.

[Mary C]

At the risk of starting another war, yes, "substantial" can be interpreted different ways. We interpret it to mean the if the provider changes the cost substantially or a change in providers due to a relocation changes the costs substantially. The key is that care is still being provided at a change in cost. We do NOT consider going from paying for care to no care as a change in cost. And as Papogi states, it still must be done within the time frame allowed by your plan AND be consistent with other changes the plan has allowed under this category, if any.

[papogi]

This is an interesting one, and I can certainly see your interpretation, Mary C. The regs do say that in the case of DCSA's the cost change must be imposed by a "day care provider who is not a relative." However, assume a child is 12 years old and in day care. The parents decide that the child is old enough to be at home without care, and stop day care, so there are no more expenses. Both parents still work, and the child is still technically eligible for day care expenses. Since the child has not turned 13, there is no loss of eligibility, so I suppose you could still force the employee to continue the DCSA. You convinced me. It still seems strange, but it does seem to be written in a way that it would prevent this change. Sorry, Elijah. Since there is no uniform reimbursement requirement with DCSA's, I see no reason why the IRS would not want to allow someone to stop a DCSA if they voluntarily pull their child out of day care. Perhaps the IRS just wants to be sure that every kid under 13 is in some form of day care. Big brother is indeed looking out for us.