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Where to Start
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Working with your Combined Services Representative, your employer should create an outline of the features they would like the plan
to include. The Dependent Care Reimbursement Account is subject to more statutory limitations as far as the plan layout, so there
will be fewer choices for the employer to consider. There are some legal restrictions which your representative can go over,
but here are some elements to consider for your Dependent Care Reimbursement Account:
| • | Should the plan include insurance premiums for medical, dental, life and disability? |
| • | Should automatic enrollment be included in the plan? |
| • | Will employees be allowed to change their elections outside of open enrollment? |
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Important Points to Consider
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Child Care Credit vs. Dependent Care Reimbursement Account
Employees who are considering the Dependent Care Reimbursement Account should weigh its tax advantages against the
Child Care Credit. They should complete the IRS Tax Form 2441 to make a comparison or consult their tax advisor.
Advantages can vary from one employee to another depending on income and eligible dependents.
Employer Eligibility
Any Employer can sponsor a Dependent Care Reimbursement Plan, but certain individuals are not eligible:
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Self-Employed Individuals* |
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Partners in a Partnership* |
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A Shareholder who holds 2% or more in a Subchapter S Corporation* |
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Members in an LLC |
*These individuals are allowed to sponsor Dependent Care Reimbursement Accounts.
Employer Eligibility
Only employees that meet certain criteria are eligible to participate in the Dependent Care Reimbursement Account. It is
based on employment-related expenses pertaining to dependent care. Below is a list of criteria:
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The need for dependent care expenses must be directly related
to the gainful employment of the employee and his/her spouse (if applicable). |
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The Dependent Care expenses must be incurred for the care of qualifying
individuals who are: dependents age 12 and under and are claimed as the employee's tax dependent, and/or a spouse
or other tax dependent who is unable to care for himself/herself physically/mentally and lives with the employee. |
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A Shareholder who holds 2% or more in a Subchapter S Corporation* |
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The Dependent Care expenses must be for the well being and protection of a
qualifying individual. This does not include expenses for food, clothing or education. However, if the cost of childcare
for example, includes the cost for meals which cannot be broken out of the expense, it can be included. |
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Dependent Care funds cannot be used for tuition for education (ex. kindergarten)
or overnight camp. |
Employee Risk Factor
Like the Medical Reimbursement Account, the Dependent Care Reimbursement Account is a "use-it-or-lose-it" plan. If a
participant does not use all the funds elected to their Dependent Care Reimbursement Account by the end of a given
coverage period (or a grace period if one is written in the plan document) those funds are forfeited to the plan.
The Employer must disclose this important element to employees in the Summary Plan Description. To be sure that
employees understand how their specific Dependent Care Reimbursement Account is set up, the employer should provide
additional communication materials for them to review. Combined Services can supply materials on this topic
for distribution.
Participant Restrictions & Accountability
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Expenses that participants receive reimbursement for under the Dependent Care
Reimbursement Account cannot be claimed under the child care credit portion of their tax returns. |
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The employee will be required to fill out IRS Tax Form 2441 when filing their
tax return. The employee must indicate any money that was forfeited on this form. |
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Neither the employer nor the claims administrator bear any responsibility
for the participants' taxes. Each participant in the Dependent Care Reimbursement Account remains fully accountable
to the IRS to prove the eligibility of any expense that is submitted. |
Effects on Social Security
Because the money in the Dependent Care Reimbursement Account is taken out of the participant's salary before taxes, the
pre-tax amount is no longer considered part of the employee's gross salary. The participant's Social Security withholdings
will only be deducted from the lower, adjusted gross salary which means less money will be allocated toward the employee's
Social Security earnings. Generally the overall impact on the participant's Social Security benefit is small.
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Plan Implementation Requirements
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Written Plan Document
The Internal Revenue Service (IRS) requires that any company implementing a Dependent Care Reimbursement Account, have a Written
Plan Document in place with required language detailing: the benefits under the pre-tax plan; participation and
eligibility requirements; open enrollment; qualifying status change events (if applicable); plan administration; continuation
of coverage; and a claims procedure. Once your Company decides how the Dependent Care Reimbursement Account will be administered,
Combined Services can provide a Written Plan Document that will meet the IRS's requirements.
Key Items to be Included in the Written Plan Document:
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Participant eligibility requirements |
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Waiting periods if elected - Open enrollment time |
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List of which events will merit a change in enrollment between open
enrollments - if qualifying events are adopted |
Statutory Limits on Contributions
Unlike the Medical Reimbursement Account, the maximum cap has been set by the IRS for the Dependent Care Reimbursement Account election.
The employer may choose to set the election less than the IRS cap, but they cannot go over it. Below is the cap set by IRS statute;
they are calculated by calendar year and equal to the smallest of the following amounts:
Key Items to be Included in the Written Plan Document:
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$5,000 (if the employee is married & filing a joint return or is
single & filing a single individual return); |
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$2,500 (if the employee is married but filing separately); or |
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the employees earned income; or |
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the spouse's earned income (if the employee is married at the end of the taxable year). |
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If a spouse is not gainfully employed because he or she is a full-time student
or is incapable of self care, then the spouse will be deemed to have an income of $250 per month for one qualifying
individual or $500 per month for two or more dependents who qualify. |
Notice the statutory limits are based on how income taxes are filed and employment status, not the number of
eligible dependents.
Adoption
Once the Written Plan Document has been completed and reviewed, it must be adopted by the company before the effective date.
This adoption process should be through the same channels the company uses for any other major business transaction.
Summary Plan Description
The Department of Labor requires that ALL of your eligible employees receive information on how your specific Dependent Care Reimbursement
Account works. When the plan becomes available to your employees, or when you have new hires or newly eligible employees, you should
give them a Summary Plan Description. The Summary Plan Description outlines, in simplified terms, the Dependent Care Reimbursement
Account's advantages and limitations; the name and address of the Plan Administrator; and a person who employees can contact if they
have questions or complaints regarding the benefits of the plan. Combined Services can create a Summary Plan Description that will
meet these requirements that you can distribute to employees. Once in place, the Summary Plan Description should remain available
for employees to review.
Non-Discrimination Testing
The IRS requires that companies implementing a Dependent Care Reimbursement Plan complete Non-Discrimination Testing
each plan year. This is to ensure that "key employees" in a company do not receive an unfair tax advantage from the plan.
The IRS has a series of non-discrimination tests that your Company or Combined Services can administer.
(see Non-Discrimination Tests in Forms & Samples Section)
Constructive Receipt Doctrine
According to the IRS, if the requirements for Dependent Care Reimbursement Plan are not met, such as the adoption of a Written
Plan Document, the company's employees will be taxed on their Dependent Care Reimbursement Account under the Constructive Receipt
Doctrine. Rather than treating this plan as a non-taxable benefit, it would be treated as a taxable benefit.
Irrevocable Election Requirement
Before enrolling, employees must be made aware that the Dependent Care Reimbursement Account has what is known as an Irrevocable
Election Requirement. Once an employee elects to participate in the Dependent Care Reimbursement Account, he/she cannot make any
changes to his/her election until the next open enrollment. However, if the employer chooses, the plan document can be set up with
a list of IRS approved, qualifying events. In that case, an employee could change his/her election prior to the next open
enrollment if he/she experienced a qualifying event. The election change would have to coincide with the life qualifying
event in order for a change to be made to the account. (see Qualifying Events)
Qualifying Events for Election Change During Plan Year
The Irrevocable Election Requirement limits when employees can change the elections to their Dependent Care Reimbursement Account.
However, an employer can choose to include a set of Qualifying Events in the plan document which would allow the election amount
of a Dependent Care Reimbursement Account to be changed or terminated in accordance with an employee's life changing event
during the plan year. According to the IRS, an employer is not required to make any exceptions to the Irrevocable Election
Requirement. If an employer chooses to make exceptions, the IRS does have some specific guidelines for which events can be
considered qualifying events for a change in election outside of open enrollment
If your Company decides to include qualifying events in the Written Plan Document, the events chosen must fall within the
guidelines laid out by the IRS. Keep in mind, employers may choose as many or as few of the IRS's exceptions as they feel
necessary. Your Combined Services Representative can walk you through the options available to you. Below is a list of
the more common IRS approved qualifying events for election changes to a Dependent Care Reimbursement Account:
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Change in Marital Status |
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Change in Number of Dependents |
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Significant Change in Cost |
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Change in Employment Status for employee/spouse |
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Legal Decree Ordering Change in Coverage |
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Dependent Care Requests & Contributions
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Participant Contributions
Unlike the Medical Reimbursement Account, the "Uniform Coverage Rule" does not apply to the Dependent Care Reimbursement
Account. The full amount elected by a participant is not available to him/her on the first day of the plan year.
Claims cannot exceed the funds that have been contributed to date at any time during the plan year.
Advance payments cannot be made for services that have not been rendered. Funds from the Dependent Care Account can
only be used for services that have been rendered. For example, the deposit and two weeks advance payment for summer
camp would not be eligible for reimbursement before camp started. After two weeks of camp pass, the original advance
payment would be eligible, but the deposit would remain ineligible.
A participant cannot be reimbursed for more than what the statutory limit allows. (see Statutory Limits on Contributions)
Reimbursement Request Process
Combined Services processes Dependent Care Reimbursement Requests according to the guidelines set by the IRS. The eligible
participant needs to provide adequate claims substantiation of employment-related expenses to be reimbursed through this plan.
The request must include the following documentation from the caregiver or daycare center that is in compliance
with state and locals laws:
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Date of service within the plan year |
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Charge that was incurred |
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Nature of employment-related service |
The participant must provide the following information on the request:
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Social security number of caregiver or tax identification number of daycare center |
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Name, age and relationship of dependent to participant |
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Statement that the expenses incurred were not and will not be reimbursed
through another source |
The reimbursement requests with the proper documentation (copies are acceptable) can be submitted to Combined Services LLC through mail, fax, e-mail or in person at:
Combined Services LLC
15 North Main Street, Suite 300
Concord, New Hampshire 03301-4945
Fax: 1 603 224-4256 |
Combined Services processes dependent care reimbursement requests according to the guidelines set by the IRS. Reimbursements
are released weekly for valid requests of $40 or more and can be paid to the participant by check or direct deposit.
(see Forms & Samples for Direct Deposit Authorization Form)
If participants have questions, they can reach a Combined Services Flexible Benefit Claims Analyst, Monday through Friday,
from 8:00 a.m. to 4:30 p.m. (EST), toll-free at 1 888 227-9745.
Grace Period
A company may choose to include a "Grace Period" to their Dependent Care Reimbursement Plan as provided in IRS Notice 2005-42.
With a grace period, an employee may submit claims for payment/reimbursement up to 2½ months (15th day of the 3rd calendar month)
past the plan year to be paid with left over funds from the immediately preceeding plan year. In other words, if a
company's plan document for Dependent Care Reimbursement included a grace period; and one month after the plan year ended,
a participant incurred a new qualified dependent care expense and submitted a claim with the proper documentation; the
claim would be paid from his/her funds remaining from the prior year.
Unlike Medical Reimbursement, a grace period for a Dependent Care Reimbursement Plan could have tax ramifications
for the participant. You should consult your Combined Services Representative before implementing this option.
Run-Off Period
According to the IRS, employers who adopt a Medical Reimbursement Account must allow for a Run-Off Period of at least 30 days. The run-off period, not to be
confused with the grace period, is an additional number of days after the plan year has ended for participants to submit reimbursement requests for medical
expenses that were incurred in that proceeding plan year. It is not an opportunity to incur new medical expenses for reimbursement. However, the run-off
period does run simultaneously with a grace period (if one is included in the plan document).
The IRS mandates that 30-days be allowed for those last minute reimbursement requests, however, Combined Services recommends that employers extend the
run-off period to 90-days because once the run-off period ends, (if there is no grace period) the participants' unused funds are forfeited to the plan.
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Plan Administration
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Debit Card Option
Unlike the Medical Reimbursement Account, many dependent care providers may not accept credit cards. In cases where credit cards
are accepted, the charges paid with it can only be for services rendered, not for anticipated services. Once payment has been
made with the debit card, the participant is required to provide receipts of the transaction to Combined Services to substantiate
that the purchase fell within IRS guidelines as employment-related services.
If after Combined Services' third request for documentation, the cardholder is unable to provide the proper documentation
for a transaction, he/she is required to reimburse the employer for any expenses that were ineligible or unsubstantiated.
Employers should refer to their plan document or contact Combined Services if they have questions on this procedure.
Enrollment Forms
In order to enroll in the Dependent Care Reimbursement Plan, employees should submit signed election forms stating specifically
how much money they would like to contribute to the account through salary reductions for the plan year. Employees should fill
out a new enrollment form each plan year or if an employee changes their election due to a qualifying event.
(see Qualifying Events)
Enrollment forms should be forwarded to Combined Services at least one month prior to the start of the plan year to set up the accounts.
Payroll Changes
For those employees who elect the Dependent Care Reimbursement Plan, payroll will deduct their elected salary contribution before
income and FICA withholdings. The amount of the contribution should be clearly stated on the signed enrollment form. Copies of
these election forms should be sent to Combined Services as well to set-up the accounts.
Employers must also adjust the payroll system to show the amount deposited to the Dependent Care Reimbursement Account on
participants' W2 forms so that the IRS is aware that this benefit has been utilized.
Termination of Employment
Unlike a Medical Reimbursement Account, participants of the Dependent Care Reimbursement Account cannot be reimbursed for more than
they have contributed in their accounts. So, the employer will not be responsible for the difference between an amount reimbursed
and an amount contributed.
If the former employee has contributed more funds into the Dependent Care Reimbursement Account than he/she has been reimbursed,
he/she can continue to submit Dependent Care Claims for the remainder of the plan year to be reimbursed up to the total of the
funds contributed prior to termination.
If after the plan year ends, a balance remains in the former employee's Dependent Care Reimbursement Account, those funds will
be forfeited to the plan. This is the assumption of risk that the plan participant assumes when enrolling in the Dependent
Care Reimbursement Plan.
Open Enrollment
Each year should bring an Open Enrollment period for un-enrolled employees to opt for the plan, or for participants to change or
terminate their elections. If employees choose to keep their election the same as the prior year, they will still need to
complete new enrollment forms confirming the election amounts with their signatures. Enrollment forms should be sent to
Combined Services to set-up these accounts at least one month prior to the start of the new plan year.
Annual Non-Discrimination Testing
Companies that adopt a Dependent Care Reimbursement Plan must complete non-discrimination testing each plan year. The IRS
requires this Annual Non-Discrimination Testing to ensure that "key employees" in a company do not receive unfair tax
advantages from the plan. (see Non-Discrimination Tests in Forms & Samples Section)
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Contact Us
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The laws regarding Flexible Benefits can be complex. This online guide is only meant to be used as an overview to administering
those benefits. If you have specific questions that are not answered here, you should refer to your Company's Plan
Document or Summary Plan Description for more details. You should also feel free to contact a Representative at
Combined Services LLC if you need assistance.
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