Eligible dependent care expenses while employee is not at work (e.g.,

[Guest SandiY]

We are in the process of implementing both Medical and Dependent Care Flexible Spending Accounts. We've been advised by our third party administrator that employees' dependent care expenses when they are not at work, such as vacation, sick leave, LWOP, are not eligible expenses, even if the employee is out for only 1 day. How do most employers handle this type of situation? Do you agree that we should advise employees that even 1 day of absence should make their dependent care expenses for that day ineligible? Do you specifically ask employees on their dependent care reimbusement claims forms something like: "Did you and your spouse (if married) work the entire time you are claiming for expenses?"

[Guest CLKeown]

Sandi -

I haven't ever seen a question like that on any FSA reimbursement form.

I would think that the recordkeeping would be very difficult for that situation since many dependent care providers charge a per week fee regardless of the child's attendance. So in most cases even if the employee kept his/her child home with them while sick they would be charged the full week fee.

How would the employer breakdown the daily cost?

[Guest Brian Cummins]

I would be under the conclustion that as long as the employee is active and has not been terminated that he/she is entitled to all the benefits of the plan.

[Sheila K]

This sure seems like a harsh ruling to me. If I interpret it correctly, when I call in sick because I am ill, I have to keep my kids home with me or lose my dependent care eligibility for the day???

Realistically, how much time would you want to spend policing this section of your plan? I would be more likely to advise employees, then leave it between the employee and the IRS to duke it out, should it ever come to that (and what are the odds???)

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Good Luck!!!

Sheila K 8^)

602 683-1013

[GBurns]

The rules for deductibility do say for purpose of work or finding work. However, since sick days are absences from the job site and not absences from work, these days are eligible. Vacation days are technically not eligible, since these are expected to be "family time" and therefore the children would not be in care, however, there usually are no claim submission for this time, since there is usually no receipt from the care provider. Any exceptions to the above should be small enough to fall under the "de minimis" rules etc. That is why you probably dont see the question being raised by most TPAs.

[Guest jreddi]

I agree with you all, however my TPA has put in our SPD that "To be eligible to participate in the Dep Care Account, you must be at work while your eligible dependents receive care." They have stated, without giving IRS backup, that this means that the employee cannot claim expenses while they are on LOA and that the IRS made a recent ruling on this. Any thoughts?

If a person is on medical leave (say, pregnancy leave), I don't think she should be penalized if her deps receive daycare. After all, she would have her hands full with the newborn. What if she is bedridden prior to delivery? Should she be forced to take her deps out of daycare because she is not at the worksite? I really don't think so! This seems draconian.

[Guest EMK]

Nothing says you can't utilize day care for your dependents when you are not working (e.g., vacation, etc.), simply that you cannot use pre-tax dollars to pay for it. Also, when you are on a leave without pay, obviously your pre-tax deductions for dependent care cannot be deducted since you don't have a paycheck.

One large reimbursement account TPA simply has the to/from dates and a place to indicate the number of eligible days for which care was rendered. I found this helpful, since if I was ever audited, I had a record of # of eligible days of day care utilized. Obviously, even with a two-week vacation thrown in, the monthly charge was the same regardless of the number of days care was used.

[GBurns]

Warning. What your TPA says or puts in a SPD is not law nor even necessarily correct. There are many things that TPAs say and do that will not stand up.

[Guest SandiY]

Update!

I spoke with an attorney at the IRS yesterday. She said she's the authority at the IRS regarding the question on whether or not dependent care expenses are eligible expenses while an employee is on vacation/sick leave, etc.

Her answer to me:

A technical and precise application of the law is that even 1 day of absence, whether for vaction, sick, etc. and whether or not employee is hospitalized, for example, would result in the dependent care expenses for that absence being ineligible.

She further went on to say that, while she's not in the enforcement end of enforcing section 125 plans, she believes employers have some leeway. She believes that short-term absences (which she said would probably be up to one week), would probably be OK to claim.

After my above conversation with the IRS attorney yesterday I would conclude the following: conservative employers would take the position that dependent care expenses during an employee's absence one or more days of absence, regardless of whether it's sick, vacation, LWOP, etc., would be ineligible. A less conservative employer would take the position that dependent care expenses are eligible for the 1st week of an employee's absence, however, after that they are ineligible.

Hope this helps everyone!

Note: I also discussed with this IRS attorney my question on "kindergarten" - whether or not kindergarten is an eligible expense (see my other posted question on this subject for the answer).

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SandiY