Many employers are instructing employees to work from home in order to help in containing the spread of COVID-19. Other persons are simply experiencing reduced work schedules, for instance in the travel industry. Many school districts are announcing closures, and private childcare settings such as daycare, onsite child care and after-school activities are also closing in order to minimize the spread of transmission.
Needless to say, these developments are disrupting childcare arrangements that were expected to be in place when employees made salary deferral elections under their employers’ dependent care assistance plans (DCAPs) during open enrollment periods. As a general rule, elections made under a DCAP are required to remain in place for a full plan year, absent a change in status, in which case a participant may change their election on a prospective basis in a manner that is on account of, and consistent with, the change of status. Treas. Reg. Sec. 1.125-4(c)(1).
When can parents affected by these scheduling gyrations make mid-year elections under their dependent care flexible spending account, to change amounts set aside pre-tax for child care? The answer depends, of course, on the factual circumstances.
School closure itself does not squarely fit within the existing regulatory categories of changes in status. The closest analogy might be a change from one child care provider to another which results in a cost change. It is possible that subsequent guidance from the IRS will clarify that school closure that results in the need for childcare expenses, is a permissible grounds for a mid-year election change. By contrast, a reduction in child care costs due to closure of a daycare center or onsite childcare facility is a recognized basis for a participant to reduce or eliminate future deferrals.
With regard to parent working schedule changes, the guidance is is also clear in many, but not all, instances. Take the airline worker whose schedule has been reduced from full-time to part-time, so they are home several hours per week and can care for their child who would otherwise be in daycare. This is a permitted basis to change their salary deferral to reduce the amount set aside for dependent care.
What about the hospital worker whose schedule has gone from part-time to full-time as a result of the health crisis and needs more childcare as a result? That person could prospectively increase their DCAP elections on the same basis.
What about the engineer who is working full time, but from home, at the recommendation of their employer, and wants to take their child out of daycare? Technically if they are still expected to work eight hours per day, they have not had a schedule reduction and arguably don’t have grounds to make an election change. However if the engineer’s spouse was laid off as a result of the health crisis and was available to care for their children at home for free, that might be an independent reason for a reduction in salary deferrals.
Due to the national state of emergency that has been declared, it is possible that everyone will be confined to their homes in the near future and that childcare workers simply will not be available. In such a case, DCAP election changes will be the least of our worries.
The above information is provided for general informational purposes only and does not create an attorney-client relationship between the author and the reader. Readers should not apply the information to any specific factual situation other than on the advice of an attorney engaged specifically for that or a related purpose. © 2020 Christine P. Roberts, all rights reserved.
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