COVID-19: Can dependent care assistance program Elections be Changed Midyear?

Due to the coronavirus (COVID-19) pandemic, employers are now faced with many challenges with their workforces, including responding to changes in employee benefits programs. In response, they have many questions. Here’s one question from an employer:

Q. One of our employees has approached us with a dilemma. She would like to revoke her dependent care assistance program (DCAP) election under our calendar-year cafeteria plan. The reason is that her dependent care provider has closed due to the coronavirus (COVID-19) pandemic. She tells us that a neighbor has offered to take care of her children at no cost. Can we allow a midyear election change under these circumstances?

A Yes, if your plan document has been drafted as expansively as IRS rules allow for midyear election changes due to changes in cost or coverage. The rules apply broadly to dependent care assistance programs (DCAPs), permitting midyear election changes in a variety of circumstances that involve changes in care providers or in the cost of care.

IRS officials have informally commented that a DCAP election change is permitted when a child is switched from a paid provider to free care (or no care, in the case of a “latchkey” child). Other circumstances in which IRS rules would allow a DCAP election change include a modification in the hours for which care is provided or in the fee charged by a provider. However, an election change isn’t allowed if a modified cost is imposed by a care provider who is the employee’s relative, as defined in IRS rules.

Note: While the cost or coverage election change rules apply broadly to DCAPs, they don’t apply to health flexible spending arrangements (FSAs). This is one of several areas in which the rules differ for health FSAs and DCAPs.

Contact Kirsch CPA Group with any questions.