FSA - Salary Reduction for Dependent Care

[Guest Liz Mikkelson]

Can an employee elect an annual dependent care salary reduction amount to be withheld for the year, e.g., $5,000, and request that the $5,000 be withheld over a period shorter than the 12 month plan year?

Similarly, can an employer, by the terms of the plan, require that annual salary reductions for the health care reimbursement account be paid by employees over the first 6 months of the plan year?

[papogi]

I have seen nowhere in the regs that says either approach cannot be done, but there are problems (the 12-month plan year rule must still apply, however). For example, 125-2(Q7) says that if someone in one of these types of payment plans separates from service, the employer must “reimburse the employee for any amount previously paid for coverage or benefits relating to the period after the date of the employee’s separation from service.” So, the employer must be prepared to potentially hand this money back to the employees should they terminate. In the case of the DC account (which is not subject to the uniform reimbursement requirement), a minor problem also arises for terminated employees who have already used up the $5000. Keep in mind that DC accounts need to make available to the employee those amounts which have actually been deducted. That means that someone might get his or her $5000 before the end of the year in this case. How do you get a prorated amount back from the terminated employee (if you wanted to)?