Dependent Care Discrimination Testing

[card]

Hi-

Employer maintains a dependent care flexible spending account. Employer anticipates failing the 55% test and decides to cut back all HCE's from $5,000 maximum deferral to $4,000.

HCE's spouse is employed by a different employer. Can HCE's spouse elect to increase her coverage under her employer's dependent care reimbursement account plan by the $1,000 lost under the HCE's plan?

This type of change would have to be showhorned into 1.125-4(f)(4). It doesn't seem to fit nicely. But the spouse's employer might argue that there has been a reduction in coverage in the HCE's plan (the change in the maximum permitted dependent care deferral/reimbursement), and the HCE has made a "deemed election" under the other employer's plan consistent with that reduction.

Anybody see this before? I haven't been able to find any IRS guidance.

Thanks.

r.

[papogi]

I've never specifically seen this before, either. I agree with your reasoning. I think the spouse should be able to increase her DC election.

[Guest lschaab]

What about the HCE who elected $5K initially, had to be reduced, but due to changes in the workforce mid year the test results indicate the HCE's withholdings could now be adjusted upward?

[papogi]

I would think you have an argument as long as you don't exceed the amount on the original election form. The only problem you might have is a situation where an HCE elects a low amount one year because of his/her past experience having to reduce the election mid-year, only to find out that he/she didn't need to artificially lower the original election this year and wanting to raise the election. In that case, they shouldn't be allowed to increase.

[Guest lschaab]

Selfishly, our answer is great for my own personal election, and might be good news to our customers who have had to experience the pain of adjusting DCAP elections downward. Anyone else have an issue adjusting upward as long as it does not exceed the original election?