Dependent Care Reimbursement Account

[Guest David G]

Employer offers a dependent care reimbursement account (DCRA) funded only by employee salary reductions. Is it permissible for the plan and the employer to allow reimbursements up to the annual elected limit, even if the account balance at the time of the reimbursement does not have sufficient funds to support the reimbursement? The employer, in effect, covers the deficit until the salary reductions cover the deficit. If this approach is acceptable, does it present problems for the employer or employee, particularly if the plan has a fiscal year and there is the possibility that reimbursements to an employee could exceed $5,000.00 in a particular calendar year?

[Lisa Hand]

There is no requirement for the employer to level fund the Dependent Care Assistance benefit. Additionally, since you are supposed to be reimbursed only for expenses you have incurred, documentation would not support advanced claims for DCA. Finally, from the employer's perspective there is absolutely no reason to risk possible loss in this benefit.

[Guest David G]

Lisa:

In this case, the employer wants to treat the DCRA in the same fashion as a HCRA with regard to the uniform coverage requirement. The employer will not be paying for expenses before the services have been rendered. The employer is apparently comfortable that forfeitures of the plan will cover any shortfall. The employer views this as benefit to the employee and is willing to bear the risk. On the other hand, I am concerned that because the plan is a fiscal year plan, that some employees could, in a given calendar year, receive reimbursements in excess of $5,000.00 resulting in taxable income to the employee unless the employer closely monitors the reimbursements on a calendar year basis. The employee, of course, would be limited to $5,000.00 in the plan's fiscal year. Are my concerns about the possibility of taxable income to the employee justified?

Thanks David G.

[This message has been edited by David G (edited 02-19-99).]

[Joe Priselac]

Dave,

You can operate a dependent care reimbursement account on a level funding basis. Although there is no legal requirement mandating this like there is in a medical FSA, there is no rule prohibiting a plan sponsor from operating DCA in this manner. The second concern about over reimbursement should be resolved by proper tracking of reimbursement amounts. We have successfuly operated plans along these lines.

[Guest David G]

Joe:

I assume that if you had a calendar year plan, that over reimbursements would not be a problem since the $5,000.00 limit is tracked on calendar basis. Would the arrangement I mentioned in my first post be difficult for a TPA to administer since it appears that this is not a typical arrangement? I had assumed that the arrangement I mentioned earlier was rarer than a hen's tooth, i.e. nonexistent.

Thanks

David

[Joe Priselac]

Dave,

It certainly would be easier if the plan were calendar year, but it should not be impossible to keep track of a fiscal plan year. In reality 99% of the claims are handled the same as a conventional DCA because of the way most people pay for dependent care.

Joe