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Dependent Care FSA reimbursements: IRS Information Letter 2020-02

What determines when dependent care FSA reimbursements can be made? Does it go by tax year, plan year, or employee participation date? The IRS answers an employer’s question in a recent information letter.

Dependent Care FSA reimbursements are tax free with a Core 129 plan document package from Core Documents.

Dependent Care FSA reimbursements: IRS Information Letter 2020-02

IRS Information Letter 2020-02: Cafeteria Plans addresses the Section 129 Dependent Care Assistance Program (DCAP FSA) as part of a tax-saving Section 125 cafeteria plan. Specifically, the letter answers an employer’s question on which expenses are payable through dependent care FSA reimbursements when a participant enrolls after the start of the plan year.

Why would this happen?

This situation may arise when an employee goes from part-time to full-time and is eligible to participate in the DCAP FSA beginning July 1 of a January 1 – December 31 plan year, or when an employee is hired in the middle of a plan year.

In both cases, the employee may have paid for dependent care earlier in the plan year – before they were enrolled in the DCAP FSA – and hope to be eligible for dependent care FSA reimbursements for those earlier costs with tax-free dollars after they have enrolled in the DCAP FSA.

And, it makes sense, in a way. The expenses were incurred and paid in the same tax year, after all.

From the IRS

However, the IRS refers to Section 125 of the Code, saying, “A Section125 cafeteria plan may pay or reimburse only substantiated expenses for benefits incurred on or after the date the employee is enrolled in the plan.”

The IRS is not discriminating against parents by setting this rule for DCAP FSAs alone. The same goes for all tax-saving benefit plans.

Core DCAP Plan Document

For more information on Section 125 Dependent Care FSAs, visit our DCAP page @ www.core129.com.

Resources:

Core DCAP brochure with forms:

See other plan documents required by IRS/DOL:

Click to open/download: Tax-Free Employee Benefits that Require Plan Documents from Core Documents, Inc.

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