DCAP Reimbursements After Return From Leave

Hypothetical scenario:

Employee properly elects to contribute $1,200 ($100 per month) to to her dependent care reimbursement plan (DCAP) account for 2023.  Employee incurs $400 of qualified expenses in January and February of which she obtains reimbursement of $200 (because that's all she had contributed at that time).  On March 1, 2023, she goes on leave (FMLA or non-FMLA leave; I don't think it matters) and elects to cease DCAP contributions at that time.  On July 1, 2023, she returns from leave and elects to restart the DCAP.  Can she use the $200 that she contributed in January and February (but was unable to use then) to reimburse expenses incurred in July through the end of the year or is that $200 forfeited?

The cafeteria plan regulations discuss this for health FSA contributions (yes, she would be able to) but I have not been able to find anything discussing DCAP contributions.

Any help or thoughts is appreciated.

That's a difficult one because it will depend on how the plan defines the "period of coverage" for these purposes.  My guess would be the plan document doesn't specifically address whether an employee who was a participant, revoked the election mid-year, then enrolled again mid-year will have two separate periods of coverage for this purpose.

In other words, while it's clear expenses incurred during the period the election was revoked from March-June would not be eligible, it's not clear whether the period of coverage would bridge the gap to cover claims in the initial period of enrollment (Jan-Feb).

The plan could take the position that each period (Jan-Feb and July-Dec) are treated separately.  In that situation, the employee's contributions July-Dec would not be able to reimburse claims incurred Jan-Feb.  Essentially, the employee would be treated in the same manner as a terminated employee at the end of Feb, and then treated as a newly eligible employee again in July.  Any unreimbursed balance at the end of the initial participation period would be subject to use-it-or-lose-it and forfeited.

However, I think the plan could also take the position that any months in the full 12-month plan year in which the employee participates (in this case, Jan-Feb and July-Dec) are the employee's "period of coverage."  In that case, the incoming contributions in July-Dec could be applied to reimburse the $200 remaining balance from the Jan-Feb claims.

Ultimately, I think the FSA TPA will probably direct the situation through it's standard administrative and systems processes.  I would check with the TPA for how they administer these types of situations.

Prop. Treas. Reg. §1.125-5(a)(1):

(a) Definition of flexible spending arrangement.

(1) In general. In general. An FSA generally is a benefit program that provides employees with coverage which reimburses specified, incurred expenses (subject to reimbursement maximums and any other reasonable conditions). An expense for qualified benefits must not be reimbursed from the FSA unless it is incurred during a period of coverage. See paragraph (e) of this section. After an expense for a qualified benefit has been incurred, the expense must first be substantiated before the expense is reimbursed. See paragraphs (a) through (f) in §1.125-6.

Thanks for the very quick answer.  I think your analysis makes sense.

I am seeking clarification/regulatory guidance on the following scenario:

DCFSA plan has a run-out, grace period, and spend down provision allowing reimbursement of any remaining balance upon separation of employment for eligible expenses through the run-out period (March 31st) following the end of the plan (calendar year). While we understand that leave is a qualifying event allowing participants to choose to discontinue DCFSA contributions during the leave period, allowing them to pay the contributions on a post-tax basis for that period is of no benefit to them. Given our plan provisions, once a DCFSA participant goes on an unpaid period of leave (FMLA or otherwise), shouldn't the employer automatically terminate the DCFSA for the period of unpaid leave since there are no eligible expenses during the period of leave. Given the plan provisions (and confirmation from our TPA), even though the account would be "terminated", the participant will still be able to submit reimbursement (based on available balance prior to leave period) for eligible expenses incurred prior to the leave period. So, no adverse impact for the participant and this prevents the possibility of ineligible expenses (leave period) being reimbursed. Is this position reasonable and/or do regulations speak to this?

I think that's pretty much the exact same issue we were looking into above.  Seems like a reasonable position to me.

If you're interested, I've posted some additional thoughts here: https://www.newfront.com/blog/dependent-care-fsa-during-maternity-leave-2

Thank you, Brian.