Dependent Care expense reimbursement

[Kathy]

We have a 125 with FSAs that operates on fiscal year. Dependent Care participant paid for entire summer's day care with one check at beginning of summer. The plan year ended in the middle of the summer (i.e.: about 1/2 of what she paid was for the weeks before the plan). Participant sent in copy of check and tuition bill for the total.

I've always told participants that the dependent care service is incurred on the last day of the period for which you paid. i.e. you pay on Monday for the full week but the service isn't incurred until Friday. Therefore we can't reimburse until after Friday and then only up to what you have in the Dependent Care FSA at that time and only based on the plan year that includes that Friday. I've even mentioned monthly payments in employee enrollment meetings - i.e.: you pay for the whole month at the first of the month but the service isn't incurred until the last day of the month.

So, do I reimburse the part of the expense that incurred in the plan year that ended mid-summer with dollars set aside for that year and the rest with dollars set aside this year? or is all reimbursable only with this year's dollars since the last day of the period fell in this plan year? (Which means participant forfeits last year's dollars).

And, what other documentation do I request since the bill was for the whole period as was the check they wrote?

Thanks for any help and cites you can give!!

[papogi]

If you think you can have the participant obtain two bills (one for the first time period, and another for the second time period) rather than one, that seems to be the best way, I think. It helps the employee by being able to clear out last year’s account, and it’s completely legitimate based on dates of service. If you can’t get two separate bills, I would suggest prorating the bill based on the total number of days that the bill represents, and you can then “create” your own set of two bills, and will have an argument behind it should the IRS ever audit the plan.