Dependent Care Reimbursement

[Guest Vickie Skala]

First, is pre-school fees still reimburseable under Dependent Care Reimbursement Plan?

Second, are fees paid to a school for "kindercare", which is when a child attends kindergarten 1/2 days and then "kindercare" for the other 1/2, reimburseable under Dependent Care Reimbursement Plan?

Thanks.:confused:

[papogi]

Pre-school is reimbursable.

Kindergarten is not reimbursable due to an information letter issued by the IRS which indicated their position that kindergarten is educational in nature. My feeling is that "kindercare," as long as it is submitted and reimbursed as something specifically different than kindergarten, should be reimbursable. While I would allow this, the regs allow room for interpretation. Anyway, that's my take on it.

[Kirk Maldonado]

I haven't reviewed the letter you are referring to, but it conflicts with the applicable regulation (that carries more weight).

The IRS officially does not have a position on this issue. Their former position that kindergarten expenses couldn't be covered was contained in a Publication, but that position has been dropped in subsequent editions of the Publication.]

I think that the IRS position is wrong. They can't change a regulation by means of a private letter ruling or even a revenue ruling. They have to amend the regulation, which would require reproposing the regulation in the Federal Register.

[papogi]

Here is the Info Letter:

http://benefitsattorney.com/cgibin/framed/...?ID=399&id==399

I agree that info letters canot change explicit regs, but the regs have nothing specific to help, in my view. In truth, this is certainly open to interpretation, but I would dissallow kindergarten expenses which are educational in nature.

[vebaguru]

I tried to read the letter, but the link you posted was defective. I ended up on the IRS's website in search mode able to search for "Information Letters" from 2000-2002. However, since the letter itself has not yet been cited, I could not search for it with the information I had. Please post the letter number or a better link, or leave the benefitsattorney stuff out and post the direct IRS location.

Thanks

[mbozek]

I have a problem with determining what kindergarten expenses would be considered educational in nature.

[papogi]

Sorry, this link should work:

http://www.irs.gov/pub/irs-wd/00-0246.pdf

[Lisa Hand]

Everyone might want to look at EBIAs article on this issue referencing their discussions with the IRS after the updated Publication 503 was issued which did not include the kindergarten example.

http://www.ebia.com/weekly/articles/2000/C...1214Pub503.html

Kindergarten is educational in nature and not eligible for reimbursement under a DCAP. Before and after school care is eligible for children 12 and younger, if properly attributed and documented by the provider.

EBIA also addresses this well in their legal guide, which is updated quarterly.

[Kirk Maldonado]

I disagree with Lisa Hand's position. I seem to recall that her position is the same as that espoused in EBIA. If my memory is correct, I disagree with EBIA's position as well. I have disagreed with a number of positions taken in that publication, as have a number of my other colleagues.

I was also involved with an ABA project in which we attempted to get the IRS to reverse the position that kindergarten expenses are not reimbursable. While the IRS would not accede to their prior position, they did remove the language from their Publication that stated that those expenses were not reimbursable.

I take that as a sign that we prevailed.

[GBurns]

It seems that Dependent care is only deductible or reimbureable if it is provided so that the taxpayer can work etc. these rquirements are made clear in section 129 and in the 1040 instructions.

Kindergarten is educational because is provides learning and tutoring, even if that only consists of learning nursery rhymes and fingerpainting.

Day care is the providing of care during the day in the absence of the taxpayer.

Kinder-care is the providing of Day care mixed with Kindergarten.

If whatever is provided is not related to the ability of the taxpayer to work, there is no deduction etc. Educational activities and services are not deductible or reimburseable.

If there is an overlap of services then the amounts have to be apportioned between what is provided related to work of the taxpayer and what is educational (which is deemed as treated otherwise).

The prudent thing to do is to use Day care where the educational content is not emphasised and treated as incidental. Note that Day care providers do not promote their educational activities. If someone needs the status symbol or marketing buzzword of "kinder-care" they must expect to pay for the privilege ( through loss of the tax break).

Essentially if you cannot deduct it on your tax return you should not be able to get it reimbursed through a DCAP.

[mbozek]

Since the IRS does not explicitly exclude kindergarden/kinder care as a benefit under a DCAP and there is authority that such care is not an educational benefit if it is minimal or insignificant to other services there is no reason not to to allow the benefit under a DCAP until the IRS clarifies its position. Taxpayers cannot be expected to read the IRSs mind on what is or is not a permissible benefit under a DCAP nor decipher the meaning of the vacuious terms such as "insignificant". Since an IRS challenge of the inclusion of this benefit in a plan would be found on audit of a DCAP the IRS would be required to provide authority as to why kinder care is not deductible under applicable regs/ rulings other than irs publIcations as well as the meaning of the term minimal and insignificant.

[Lisa Hand]

Kirk, please note, this is not my opinion, it is the published guidelines from the IRS. The fact you are "... involved with an ABA project in which we attempted to get the IRS to reverse the position that kindergarten expenses are not reimbursable" supports the statement that it is the current position of the IRS that kindergarten is considered educational in nature and not reimburseable under a DCAP. Therefore EBIA's legal guide would also be currently correct on this issue. Please note, it is a resource I find to be prudent, extremely accurate and useful and I deeply appreciate the level of expertise on their staff.

We may all have opinions on this issue and in a post that clearly indicates we are debating the merits of the IRS's position this would all be helpful; however, the point of Vickie's question was: is the knidercare part of the day allowable under a DCAP? And the answer would be "yes", as long as it is allocated specifically as care and work-related, it would be "no" if it was not allocated as care and considered part of the expense for kindergarten.

Obviously, if the IRS changes their position on kindergarten, we will all update our records; however, until then, we need to comply with current regulations and publications.