Dependent Care Flexible Spending Account Changes Due to COVID-19
In March and April, as states first began releasing their “shelter-in-place” orders, plan sponsors had to deal with questions about all aspects of their businesses, including their employee benefits programs. There have been many questions about COVID-19 during that time, including questions about whether dependent care assistance programs (DCAPs) could allow participants to make mid–plan year changes as a result of the unanticipated daycare, preschool and school closures parents faced, while either working from home or not working at all, and suddenly not needing to pay for child care.
For employers that offer dependent care flexible spending accounts, there are several things to consider.
IRS Releases COVID-19 Guidance Under Section 125 Cafeteria Plans
On May 12, 2020, the Internal Revenue Service (IRS) released temporary guidance in Notice 2020-29 as a result of the public health emergency posed by COVID-19. The notice details several new optional amendments impacting Section 125 cafeteria plans, health plans, flexible spending arrangements (FSAs) and DCAPs.
Plan sponsors may now consider implementing these changes to allow for flexibility when addressing the situations participants are concerned about—such as an increase or decrease in the need for dependent care assistance due to the closure of schools and child care providers as well as changes to the employee’s work location or schedule.
What Changes Were Allowable for DCAPs Prior to the New Guidance?
Enrollment in the DCAP could only be made at open enrollment, prior to the plan year. Only a few exceptions for mid–year plan changes were typically allowed, if the changes were already addressed in the plan document, including:
- Employee status changes, such as changes to marital status, number of dependents, etc.
- Employment status changes, such as moving from full-time to part-time hours, etc.
- Cost or coverage changes, such as switching the child’s paid provider to free care
- An employee taking FMLA leave.
What’s Changed for 2020?
The new guidance from the IRS allows cafeteria plans to permit the following prospective changes, even if they do not have a permissible change-in-status event:
- Participants can revoke an election, make a new election, or increase/decrease the amount of an existing election.
- Employers are permitted to limit mid–year elections to amounts no less than amounts already reimbursed.
Due to the unanticipated changes in the availability of dependent care, employees may be more likely to have unused DCAP amounts at the end of plan years or grace periods ending in 2020 and may wish to have an extended period during which to apply their unused DCAP amounts to pay or reimburse dependent care expenses. The plan sponsor can, as of the end of a grace period ending in 2020 or a plan year ending in 2020, pay or reimburse expenses incurred for dependent care through December 31, 2020.
The new guidance does not change the DCAP allowable expenses described in IRS Publication 503. Also, the guidance does not address the timeliness of participants making changes. Generally, requests should be made on a timely basis and within 30 days from the event, depending on the language of the plan document.
If Making Changes to the DCAP, What’s Next?
Today, as many businesses evaluate their reopening processes, plan sponsors and benefits professionals should update their communications to employees and be able to answer questions such as:
- Can I stop my salary deferrals if I’m working from home and no longer need child care?
- I’m not currently participating in the DCAP but now have child care expenses due to schools being closed. Can I now start an election?
- Can I increase or decrease my election amount?
- What happens if I’m laid off or terminated?
- What happens if my spouse faces a leave of absence or layoff?
The Bottom Line on the New Guidance for DCAPs
Plan sponsors are not required to adopt any of these new amendments; however, the guidance now creates flexibility to change the plan so participants can revoke, add, increase or decrease 2020 elections on a prospective basis. To do this, plan sponsors should review plan change requirements with their service providers and make changes on or before December 31, 2021. Any amendments apply to plan year 2020 for dependent care expenses incurred through December 31, 2020. If amending, plan sponsors should communicate the changes to all eligible employees so that they can plan accordingly.
If you have additional questions about your Flexible Spending Accounts don’t hesitate to Contact United Agencies for answers!
International Foundation of Employee Benefit Plans (IFEBP)
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