As the old country song by Tammy Wynette demonstrates, what happens during a divorce can be tough to spell out. Divorce can be the source of great confusion for many, including employers. They have a number of actions to take related to employee benefits when an employee goes through a divorce. Employers need to be prepared to discuss with employees the splitting of retirement plans, what happens to health care coverage, and how to handle flexible spending accounts (FSAs) such as dependent care accounts.
In this blog post, we’ll discuss what employers need to know about flexible spending accounts after an employee’s divorce. Check out the earlier posts Part 1: Splitting Retirement Benefits and Part 2: Handling Health Care Benefits.
Managing Flexible Spending Accounts After a Divorce
After an employee’s divorce, employers need to know how to handle flexible spending accounts that involve the employee’s dependents, including dependent care FSAs (also known as dependent care assistance plans or DCAPs) and health care FSAs.
DCAPs
A DCAP is an employer-sponsored benefit plan that allows employees to pay for certain dependent care expenses on a tax-free basis, up to a specified limit. Dependent care expenses can include before- and after-school care, daycare, preschool expenses and more.
Per IRS regulations, if an employee parent is divorced from the other parent, the custodial parent (a parent who has physical custody the majority of nights in the year) may elect the DCAP. Even if the noncustodial parent is financially responsible for providing childcare by a court order, the custodial parent is the only one who can be reimbursed under a DCAP. If the parents have 50/50 custody, the parent with the higher adjusted gross income is allowed to elect a DCAP for the child’s daycare expenses.
Can an employee make midyear changes to a DCAP?
Following cafeteria plan rules, an employer’s plan may permit an employee to make midyear changes to a DCAP upon a change in marital status (e.g., divorce). A cafeteria plan is not required to permit changes. If the plan language allows for the changes, an employee may enroll due to a newly eligible dependent or change contribution size, or the employee can drop coverage completely if eligibility is lost (e.g., dependent now resides with the ex-spouse). Some plans may require documentation with proof of the eligible change.
Health Care FSAs
The rule is different for a health care FSA. For a health care FSA, a child whose parents are divorced, separated or living apart is typically considered to be a dependent of both parents. This means that no matter who is the custodial parent, either parent can claim a child’s expenses under his/her own FSA, as long as both parents don’t claim the same expense for the child.
Learn More
Now that you’re up to speed on managing flexible spending accounts after a divorce, check out the related posts:
- D-I-V-O-R-C-E (Part 1) – Splitting Retirement Benefits
- D-I-V-O-R-C-E (Part 2) – Handling Health Care Benefits
Amanda Wilke, CEBS
Information/Research Specialist at the International Foundation of Employee Benefit Plans
Written by International Foundation of Employee Benefit Plans staff. This does not constitute legal advice. Consult your plan professionals for legal advice.
The latest from Word on Benefits:
- President-Elect Trump Regulatory Outlook
- SECURE 2.0 Act: What’s Coming in 2025?
- Implementing a Practical Financial Wellness Program
- Mental Health and Substance Use Disorders: Canadian Employees Continue to Struggle as Employers Focus on Education and Prevention
- Leading with Emotional Intelligence (EQ) in the Workplace
