Cross-coverage under the use it or lose it rule

[Guest planwizard]

I'm having a little trouble thinking a situation through and need some help.

Fiscal Year 125 program 6/30 pye

2 components (1)Health FSA (2)DCAP

Client starts out in June at 500/mo dcap pre-tax, anticipating claims beginning in the Fall for dependent care expenses - so accumulates, say, 4 mos x 500+2000.

Likewise employees elects 200/mo health fsa. for $2400 coverage.

Along comes October and client's spouse, with respect to whose work the DCAP funding was anticipated, decides to be a stay at home mom.

It seems to me that, prospectively, employee can stop DCAP contributions.

Question concerns the 2000 "accumulation" of DCAP money. To wit, can the employer increase the health fsa coverage to $2400+$2000=$4400, or is the $2000.00 DCAP necessarily lost under the use-it-or-lose-it concept?

Appreciate your thoughts.

[oriecat]

To my understanding, the two elections are separately and must be accounted for separately and you cannot transfer funds from one to the other.

[J Simmons]

oriecat is correct. There can be no cross-use of one type of flex account balance for the other. Health flex account dollars can only be used for qualifying health expenes; day care flex account dollars can only be used for qualifying day care expenses.

[Guest planwizard]

To my understanding, the two elections are separately and must be accounted for separately and you cannot transfer funds from one to the other.

Thanks. I want to agree with you, and I think your comment is correct, but what is the "authority" for this position. I can't find language in the 125 regulations that explicitly states such a prohibition.

[J Simmons]

The authority for no cross-pollination of health flex accounts and day care flex accounts is in Prop Treas Reg §1.125-1, Q&A-17

...a cafeteria plan benefit under which a participant will receive reimbursements of medical expenses is a benefit within sections 106 and 105(b) only if, under the benefit, reimbursements are paid specifically to reimburse the participant for medical expenses incurred during the period of coverage. Amounts paid to a participant as reimbursement are not treated as paid specifically to reimburse the participant for medical expenses if, under the benefit, the participant is entitled to the amounts, in the form of cash (e.g., routine payment of salary) or any other taxable or nontaxable benefit, irrespective of whether or not he incurs medical expenses during the period of coverage, even if the participant will not receive the amounts not used for expense reimbursement until the end of the period...

and Prop Treas Reg §1.125-1, Q&A-18

Section 129(a) provides an employee with an exclusion from gross income both for employer- funded coverage under a dependent care assistance program and for amounts paid or incurred by the employer for dependent care assistance provided to the employee if the amounts are paid or incurred under a dependent care assistance program. A program under which participants receive reimbursements of dependent care expenses up to a specified amount and are entitled to receive, in the form of any other taxable or nontaxable benefits, any portion of the specified amount not used for reimbursement is to be treated as a single benefit that is not a dependent care assistance program within the scope of section 129.