DCAP and miscarriage

[Guest Tucker]

Is there any solution for an employee who enrolled in a dependent care reimbursement account in anticipation of a birth, and then there was a misscarriage? Could this be a correctable error and the plan allow the amounts paid to be refunded without violating the tax benefits of the plan?

[papogi]

The IRS has allowed employees to nullify a DC account elected in error. For instance, an employee might elect a DC account thinking that it covers medical expenses for their dependents. In that example, the employee doesn't even have any dependents that would qualify for DC expenses. Hopefully, this employee doesn't have any other dependents that would qualify for DC expenses. Your argument could be that this employee's account was null at the time of the original election, since there were no eligible dependents. This is still a risky position to take. My feeling is that the IRS would give some credence to your argument in the vent of an audit, but you would be running the risk that the plan could be found out of compliance, making all amounts taxable to all employees.

This happens a lot, but it is another example of employees not electing the account properly. The birth of the child and the subsequent onset of day care expenses would be an event that would allow the employee to elect the DC account at that time. The advantage of starting out early with payroll deductions to lessen the blow later on is not worth the potential risk of miscarriage and the subsequent problems this places on the employer, or problems this places on the employee (if the employer takes a hard line on the account).