Dependent Care enrollment during Open Enrollment

[French]

I was advised that an married employee has enrolled in our Dependent Care FSA effective for January 2010 as he is expecting his first baby in May. At this time, he does not have a qualified dependent so I have said that he is not eligible to participate in the plan (and have deductions withheld from his paycheck) until the birth of the baby. Am I incorrect?

[jpod]

It depends on what your plan says, but I don't think there is anything in the law that would prevent your plan document from saying that he can participate even before he has a dependent. However, unless there is some reason embodied in your particular plan, which would surprise me, by all means he should wait until he needs to participate before he begins to participate. If his thinking is that he will need to use the full $5,000 after the baby is born and through the end of the year, but he'd prefer to spread the $5,000 over a full year rather than only 6 or 7 months, I understand where he's coming from, but as someone who is probably much older I would advise him that what we plan on doesn't always pan out (for example, he may have a perfectly healthy baby born in May but for one reason or another he will not need dependent care in 2010, or he won't need $5,000 worth of dependent care in 2010, or he'll have an arrangement where he decides to pay "under the table" and can't use the dependent care plan for reimbursments).

[leevena]

I would advise this person not to enroll and start making contributions, for a variety of reasons. Let's assume that your plan does allow him to enroll, and start making deductions.

First, as mentioned by jpod, they may not have eligible expenses. Secondly, what if he terminates employment prior to birth? Also, the birth in May will be a QE, allowing them to start contributions then. I am lost as to why they would want to risk half a years deductions for this.

[jpod]

leevena: French asked if he was incorrect, and the response to his question is that he probably is incorrect, assuming that the plan says what I suspect it says. Obviously, however, you and I agree that it's a bad idea to do it and the employer should advise the employee not to do it, even though in the end the employee can do it if he wishes to do it. Also, good point about the possibility of termination of employment.

[oriecat]

Yeah, I agree with the above also. Most likely okay to do, depending upon how exactly the plan doc is written, but a bad bad idea.

[Guest kimb]

Interesting that this question would come up at this time..... I just had this question asked of me today except it's the employer that's telling the employee that she needs to make her election now. I'm recommending they let her wait till the baby is born because what if a family member offers to watch the baby for free (employee will lose all the money she elected for the year!), and how can she know how much to elect at this time (doesn't have a provider picked out yet).

The employer is saying their plan doc's do not allow a mid-year change in election for the dependent care reimbursement accounts, but I sure don't see that clause in there. They're to get back to me next week with their decision.

[jpod]

kimb: A plan can be written to permit mid-year change in status changes, but it doesn't have to be written to permit it. Therefore, you shouldn't be looking for language denying mid-year changes; you should be looking for language permitting them. If you can't find that language, then the employer is correct!