Dependent Care FSA -- Year of Tax Inclusion for HCEs

[Guest cc-alex]

We have a non-calendar year Dependent Care FSA that was discriminatory at plan year's end. Are we required to impute income for HCEs in the calendar year in which the benefits were provided, or can we report all plan year benefits in the tax year in which the plan year ends?

The Health FSA rules provide that amounts are included in HCEs' income in the tax year in which the plan year ends (Reg. sec. 1.105-11(h)), and so do the cafeteria plan rules (sec. 125(b)(3)). I can't see why Dependent Care FSAs would be treated differently, and yet I can't find any clear guidance on the issue.

Note also that Prop. Reg. 1.125-1, Q&A 18, refers to the nondiscrimination requirement for Dep. Care FSAs in the context of a "plan year," which seems to imply you test for the plan year as a whole.

Any input on this would be much appreciated.

[J Simmons]

I think your analysis is solid. The reasons under 105 and 125 for tax year that the plan year ends ought to apply by analogy to Dependent Care FSAs too, in the absence of a specific rule to the contrary. I cannot think of any reason that Dependent Care FSAs ought to be treated differently.