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 business, including their employee benefits programs. In the International Foundation’s Personalized Research department, we received many questions about COVID-19 during that time, including questions about dependent care assistance programs (DCAPs), also known as dependent care flexible spending accounts (DCFSAs).
With the unanticipated daycare, preschool and school closures, parents found themselves suddenly not having expenses for paid care—leaving both employers and employees wondering if participants could make mid-plan year changes to their dependent care flexible spending accounts.
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. The notice allows plan sponsors to provide additional options to dependent care flexible spending accounts due to the unanticipated closure of schools and child care providers as well as changes to the employee’s work location or schedule.
Prior to the New Guidance, What Changes Were Allowable for DCAPs?
Previously, enrollment in a DCAP could only be made at open enrollment, prior to the plan year. Only a few exceptions to 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, etc.
- Cost or coverage changes, such as switching the child’s paid provider to free care
- Employee taking FMLA leave.
What’s Changed for 2020?
The new guidance from the IRS allows cafeteria plans to permit the following prospective changes to dependent care spending accounts, even if the participant does 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.
Also, in an effort to help employees who may have unused DCAP balances at the end of a plan year (or a plan year’s grace period) that ends in 2020, the IRS is allowing plan sponsors to permit reimbursed expenses 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 of 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 childcare?
- I’m not currently participating in the DCAP but now have childcare 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?
Bottom Line of the New Guidance for Dependent Care Flexible Spending Accounts
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. If amending, plan sponsors should communicate the changes to all eligible employees so that they can plan accordingly.
Learn More About How COVID-19 Is Changing Employee Benefits
Visit the International Foundation Coronavirus (COVID-19) Resources page to find resources for plan sponsors, including the new survey report Employee Benefits in a COVID-19 World and these upcoming free member webcasts:
- Current Accounting and Auditing Issues in Employee Benefit Plans | May 27, 2020
- Governance and Oversight Issues for Multiemployer Plan Sponsors During the Pandemic | May 27, 2020
- Common-Sense Investment Approaches to New Economic Realities | June 2, 2020
- Building High-Performing Remote Work Teams | June 3, 2020
Anne Newhouse, CEBS
Information/Research Specialist at the International Foundation of Employee Benefit Plans
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