Dependent Care FSA

[alexa]

An employee elected max 5K for 2006 for dependent care FSA

he is having 1000/mo dedcuted from pay for 1dt 5 months of year

Is this ok or must it be "uniform" over 24 pay periods?

thanks

[papogi]

Nothing definitive from the IRS on this that I've ever seen. My opinion is that you are OK, especially if you do this for all of your DC accounts. That way, you can prove to the IRS that this is your normal practice. From an administrative standpoint, you have to be careful, though. You could end up with someone terming from your company mid-year, and has sheltered $5000 from taxation that might not otherwise have been sheltered if it were deducted over the entire year. The IRS won't look kindly on that, but there's nothing explicit in the regs to prevent you from doing what you said.

[leevena]

I agree with papogi. What strikes me is why someone would want to do this. It is not in the best interest of the employee to have all of the dollars subtracted from their pay upfront. What do the other employees have to say about this? If I were asked to have all of my deductions made in the first 5 months, I would not agree.

If you allow only his/her deductions done in 5 months and the other employees over a 12 month period you open yourself to mistakes.

Good luck with this.

[Lori Friedman]

There might be a valid reason for having the entire $5,000 withheld during the early months of a year.

Under a medical FSA, the entire elected amount must be available throughout the period of coverage. If I elect $6,000 for this year, I'll have paid just $500 into the fund during January. But, I can submit $6,000 of reimbursable expenses during January, and the plan administrator has to pay up.

There's no similar rule for dependent care assistance. The plan administrator doesn't have to pay any amounts in excess of the account balance. If someone has child care expenses that greatly exceed the $5,000 maximum, that individual might want to collect his tax-free reimbursements as early as possible during the year, rather than slowly stretch out his reimbursements over 12 months.

[jmor99]

Actually, I think there may be something in the regs that requires deductions be uniform thruout the year.

Here are some other thoughts: When the deductions hit 5000 in May, what is the qualifying event that allows him to stop deductions? Hitting the plan max?

[Lori Friedman]

jmor99, I was unable to find anything related to either Sec. 129 or Sec. 125. Some research guides say that dependent care assistance withholdings are "typically" done prorata throughout the entire period of coverage, but they don't mention any requirement to do so. If you find authority to the contrary, would you please post the information so we'll all have it. Thank you.

[leevena]

Lori, I don't believe I agree with you on this one. Why would an employee care if the entire amount was in his/her account. If the employee elects to have 6K sheltered, and has $500 in the account in January, then incurs the expense in Feb, the employer needs to fund the difference. This puts some risk on the employer. Just some thoughts.

[Lori Friedman]

leevana, I think you're missing my point.

In a medical FSA, the employee doesn't care about when he contributes his election. Whether there's $500, $5,000, or $50,000 sitting in his account, the employee has access to his full election amount throughout the coverage period.

There's no similar rule, however, for dependent care assistance. The employee might want to have his contributions withheld early in the year, so he can spend the money sooner.

[leevena]

Lori...sorry, I agree with the dep care. I was thinking about medical.

[Lori Friedman]

No problemo, leevena. Now it's my turn to apologize...for misspelling your name in my last post.

[Guest SHaddon]

First, I'd check your SPD to see if it's addressed there. If not, you need to be careful that you are not opening yourself up to having to have a different funding schedule for any other employee that requests one. It would be a nightmare to administer, but once you set the precedent you're stuck.