Termination of Dependent Care FSA

[Guest AHayhow]

We have an employer group that has employees in a service industry. Some times these employees do not earn enough during a pay period to make FSA deductions. They treat these employees as having arrears and when they get their next paycheck, they make up the missed deductions.

My question is... if an employee is "in arrears" on the dependent care deductions, can their participation in the dependent care FSA be terminated? If so, is this an option that has to be given to each participant in arrears or can it be implemented across the board?

Thanks

[LRDG]

low paid EEs usually earn the greatest tax savings using the DC tax credit vs. Sec. 125 exclusion from income. DC tax credit is a tiered, income based percentage rate, with the lowest income earners, ($10k-12k) receiving the highest tax credit, 30-35%?, vs. exclusion from income using a flat rate of 24.65%? (7.65% FICA, 15% Federal tax and consertative estimate 2% state tax) . Higher paid employees using DC tax creidt will top out at 15?% vs. 24.65% by excluding from income. Other considerations for higher paid EE is elimination of $2400 max spent on DC expenses for one child using the DC credit vs. $5,000 for one child exclusion from income under a Sec. 125 plan.

Another reason the tax credit works better for lower paid empoyees is they use friends or family members who either don't charge, exchange sitting services or the care providers don't report the income which in turn prevents the lower paid employee from claiming the DC credit.

Sounds like an administrative burden, with potential for problems with constant payroll related deposit adjustments to DC account available balances. particularly at the end of the plan year in the event of a forfeiture to those who can least afford it. I'm assuming they are earning less because they are working fewer hours, in turn not using their DC provider.

I'm assuming the DC tax credit vs. exclusion from income comparison was not explained to the lower paid EE at enrollment. The oversight could be used as the rational to allow a one time election change/opt out option in the DC FSA, for the lower paid EE affected. Document with a plan amendment or technical correction, covering the dates within the plan year.

[oriecat]

You would need to have a qualified status change to allow the election to be changed. Just making less money or being in arrears wouldn't qualify as far as I know, but perhaps the conditions that are causing such would, as the above poster pointed out, with the working of less hours or something...

And of course the plan doc would have to allow a change in those situations...

[LRDG]

whithholding/neglecting to compare the more favorable DC tax credit vs. less favorable exclusion from income using DC FSA, poses an unfair burden on the lower paid employees. i consider providing the comparison an obligation to lower paid group of employees, failure to do so professional neglence.

ER (and administrator?) benefit from the neglence.

is there a professional and ethical obligation to correct the failure to fully disclose information to an employee group that the plan is prohibited from discriminating against. particularly in view of the unfavorable financial consequences of losing higher tax credit, impact on their financial stability due to insufficient earnings to fund the DC FSA, the burden of funding the DC FSA when earnings are sufficient to do so.

[oriecat]

I'm sorry, but I don't understand what your comments have to do with the original question. These people already made elections and the OP wants to know if they can change them (or have them forced to be changed) in the stated circumstance.

[LRDG]

We have an employer group that has employees in a service industry. Some times these employees do not earn enough during a pay period to make FSA deductions. They treat these employees as having arrears and when they get their next paycheck, they make up the missed deductions.

My question is... if an employee is "in arrears" on the dependent care deductions, can their participation in the dependent care FSA be terminated? If so, is this an option that has to be given to each participant in arrears or can it be implemented across the board?

Thanks

No. Making up missed deductions is permitted. I'm not aware of provisions that allow participation in a DC FSA to be terminated based on missed deductions. The circumstances do not fall within the Status Changes provisions allowing participants to revoke a prior made election.