T or F - dependent care deferrals must take place at same time daycare costs incurred?

[Guest amfam2]

Client has employee who participates in dependent care 125 plan. Wife of employee (who does not work for same employer) is on maternity leave. Couple decides to keep kids at home during maternity leave, thereby no daycare costs are incurred during leave.

Employee continues to work for employer full time during leave.

TPA for cafeteria plan has advised employer that ee must cease dependent care deferrals during time wife is on leave because there is a requirement that dependent care deferrals take place during same time daycare costs are incurred.

Does anyone know of any reg or other documentation which supports this interpretation?

I believe TPA is incorrect.

[oriecat]

I agree with you. I have an ee who contributes all year, but the kids are only in daycare during the summer. Makes it much easier to pay for when it's nice and spread out... the TPA is claiming something. They need to prove it.

[papogi]

This is all just a matter of interpretation, and the IRS does not have this spelled out in such a way that there would be no questions, or room for various interpretations. Publication 503 says that qualifies expenses are those that allow both spouses to work or look for work. It also says that payments made while one spouse is out sick are not eligible. Further, it says that expenses for dependents that qualify for only part of the year need to be looked at each day. The day that the dependent no longer qualifies is the day that the expenses no longer qualify. The TPA knows that only those expenses incurred while both spouses work are eligible. The day that one spouse no longer works is when the employee is technically not eligible for the benefit. The TPA who takes this strict interpretation is doing it for the protection of the integrity and qualified status of the 125 plan. There are status changes built into the regs to allow for DC accounts to terminate and restart in situations such as these, so allowing employees to continue deductions through maternity leave is not necessary. Allowing such deductions can actually cause some problems. Say the spouse decides to stay at home with the child after 6 or 10 weeks of maternity leave. Now the DC account terminates, but what about those deductions taken during the leave? They aren’t eligible for any reimbursement, but the employer can’t hand them back to the employee, either. Frankly, I see several reasons to interpret this rule both ways, but I don’t think that the TPA’s interpretation is off base at all.

[oriecat]

What you are saying makes perfect sense when dealing with expenses and claims for reimbursements, but the original question is in regards to the deferrals. If claims were submitted for the maternity leave time period, then they should be denied. But where does it say that you can't continue to defer for when your claims will be eligible again? The employee is still eligible for the benefit, even if the claims for that time period wouldn't be. While the election change can be offered, I don't think it can be required. If the employee knows, even with the time off for maternity, that they will hit the $5k maximum, why shouldn't they be allowed to continue deferring so they can receive the maximum reimbursement?

[papogi]

“But where does it say that you can't continue to defer for when your claims will be eligible again? The employee is still eligible for the benefit, even if the claims for that time period wouldn't be.” Correct. I have never seen anywhere in the regs that deferrals can’t continue. I think they can. I am saying that the employee can cite nothing in the regs that would require the TPA to change its stance, as this is a matter of interpretation. Say that the employee has no children, but intends to before the end of the year. The employee wants to start a DC account in anticipation of that, and signs up for one at open enrollment. The employee is technically not eligible for one, since there are no children in daycare, and most employers (not all) will not allow the employee to sign up for the DC account. The TPA can argue that once the spouse is home on maternity, the employee is actually no longer eligible for the benefit, and deductions must cease. When the spouse returns to work, deductions can be increased to compensate for the lost deductions while on leave, resulting in a full $5K election. The potential problem I addressed in my first post is a real one. It’s not uncommon for moms on maternity to later decide to put off going to work. Employers who have dealt with this issue of DC deductions accumulating for weeks, with no way for the employee to get reimbursement for them, are often the ones who have this policy in place regardless of the TPA’s stance.

“While the election change can be offered, I don't think it can be required.” Absolutely it can. Employers can always be more restrictive than 125 regs state or imply, but cannot be more generous. If the TPA chooses to take this stance, however, they might be willing to back off if they have a signed statement from the employer as to their differing wishes in administering the plan, especially in light of the fact that (I think) this issue can be interpreted in multiple ways. Perhaps the TPA would be willing to do what the employer says if they have a hold harmless on file on this issue. If not, the employer is free to find a new TPA. The TPA can interpret regs and install policies to follow those regs as they see fit. Contrary to some beliefs, TPA’s who always do what the employer says are not living up to their legal and fiduciary responsibility.

[Guest jfp]

The rule is, stated simply, you can't be reimbursed for expenses incurred while you were not participating in the plan. However, you can participate in the plan - by making salary reduction contributions - even during periods in which you are not incurring reimburseable expenses. Salary reduction contributions made during those "dry" periods can still be used to pay for expenses incurred later in the same plan year, provided you are still participating in the plan when those expenses are incurred.