DCSA Reimbursement after loss of Eligibilty

[PhilB]

I haven't been able to find a regulation or opinion on the following two situations:

1. Employee's work hours drop below minimum required in DCSA SPD. 4 months after the fact, employee calls wanting to drop from the DCSA. Our benefit plans have an automatic loss of coverage provision that terminates participants due to loss of eligibility (i.e. divorce, dropping out of school, working less than the req'd number of hours, etc.).

My understanding is that the IRS has informally remarked that no election change request by the participant is req'd. The rationale is that the initial election for coverage already encompassed the concept of cessation-and so no "change" is needed. Where the event is discovered after the fact (i.e. after the 30 day window stipulated by our SPD), we are able to terminate coverage retroactively to the date of the event and refund associate contributions on an after-tax basis (consistent with the impossibility standard). Therefore, we can drop her from the DCSA as of the date she ceased to meet the eligibility requirements and refund on an after-tax basis any contributions she has made since then.

The problem? She's submitted and been reimbursed for claims incurred while she was still considered a covered employee. We could request refunds back to the date of loss of eligibility and then pay the contributions back to her on a post-tax basis. Seems like a lot of work for almost the same result, but can't find any informal rule that allows us to just terminate her participation as of the last payroll or date she notified us of the reduction in hours.

2. Employee's spouse loses job, two months later they tell us about it. Spouse is not working so they take the kids out of daycare. We can terminate DCSA due to above mentioned automatic loss of coverage provision. Now they want to know: 1) if the DCSA can remain active (even though their kids are not in day care) so our employee can keep getting payroll deductions and they can make up the money that they are behind and then drop the plan (apparently the expenses incurred were more than they elected) or 2) if they can't do that, if spouse gets a job in the future, can he enroll back into the DCSA in order to make up the money even if they don't put the kids in day care at that time (to get out the money that they already contributed).

My answer to both of the questions in the second case was no, as the DCSA is there expressly to pay for dependent care expenses while the parents work, look for work, or go to school, not to make up for shortfalls in expense planning.

Thoughts? Comments? Opinions?

[papogi]

Situation 1: In light of Harry Beker's recent comments on improper FSA reimbursements, I think you have to ask for the money back first, then do the payroll correction. Yes, it's multiple steps, but it's the right way to do it.

Situation 2: I'm in complete agreement with you. 'No' to both questions.