Commuter Benefits and Dependent Care FSA Benefits Implications During the COVID-19 Crisis
UPDATED July 10, 2020
See COVID-19 IRS and DOL Guidance on Cafeteria Plans Chart below.
Employees may be impacted by the COVID-19 crisis in a number of ways. Changes in the workplace faced by employees may result in less transit and/or parking expenses as they work from home or changes in the use and cost of daycare. Rules regarding Internal Revenue Code Section 132 Commuter Benefits Spending Accounts and Internal Revenue Code Section 125 Dependent Care Flexible Spending Accounts can be applied in those situations.
A Commuter Benefits Account is an employer-sponsored benefit that allows employees to pay for qualified workplace mass transit (Transit Account) and parking expenses (Parking Account) using money that is not taxed.
Employees can increase, decrease, or discontinue their existing commuter benefit elections on a prospective basis each month for any reason. Employer deadlines for doing so should be followed.
For example, if an employee no longer has transit or parking expenses while temporarily working from home, the employee can change his elections even though it occurs during a plan year.
It should be noted that:
- No refunds are permitted (even on a taxable basis) for commuter amounts already contributed.
- It is not possible to transfer the balance from a transit benefit allowance to the parking benefit, or vice versa. Once the funds are posted to the appropriate commuter account, they must remain there.
- Unused amounts carry-over from month to month. Any unused funds will carry over to the next plan year in which the employee remains an active participant.
When normal commuting resumes, employees can change their commuter election to resume contributions for transit/parking.
Dependent Care Flexible Spending Accounts (FSA)
- Employees can make changes to their existing commuter election amounts on a prospective basis. Subject to the employer procedures, usually the election amounts can be changed monthly. Such change must be made before the end of a month for it to apply the next month.
- Employees can freely join,
Dependent Care Flexible Spending Accounts allow for tax-free reimbursement of eligible daycare
expenses or other custodial care for your tax dependents.
In addition to the life events like marriage, divorce, legal separation, birth of a child, adoption of a child, change in employment status, and change in tax dependents that may impact the need for care or the cost of care, certain changes in the employee’s daycare costs qualify to change an election, including:
- change in use of daycare
- change in a daycare provider
- change in an existing daycare provider’s cost (excluding a cost change imposed by a daycare provider who is the employee’s relative).
These situations may apply to employees during the COVID-19 Crisis as employees are working from home, requiring a change in the use or extent of daycare, or a daycare or pre-school programs are temporarily closed.
If the cost of eligible day care changes, an employee may be eligible to adjust the DCFSA election if the employee completes the request within 30 days. Some examples are:
- An employee changes to a different day care center, which may be more or less expensive than the previous one. The employee may increase or decrease the election amount consistent with the change in qualified day care expenses.
- A new in-home provider may be more expensive than the earlier daycare cost. The employee could enroll in the dependent care FSA or increase an existing election consistent with the change in cost.
- The new daycare cost might be part-time or intermittent and therefore less expensive than the pre-COVID-19 daycare cost. The employee could revoke the dependent care FSA election or decrease an existing election consistent with the change.
It should be noted that:
Dependent Care – New Employer Offerings
- All dependent care FSA contributions YTD will remain available only for dependent care expenses
- There is no carry-over provision. If you the DCFSA funds are not used by the end of the plan year’s runout period (and any applicable grace period), the funds are forfeited.
Some employers are offering dependent care assistance programs as employer-paid or an employer reimbursement to assist employees working from home. In that situation, the following should be kept in mind:
- The standard $5,000 ($2,500 if married and filing separately) limit on tax-advantaged dependent care continues to apply.
- The $5,000 limit applies on a combined basis to both employer-provided dependent care assistance and employee contributions to the dependent care FSA (Box 10)
- An employee that already elected $5,000 for the dependent care FSA may elect to reduce or revoke that election prospectively to address the new employer offering.
Employers can always provide assistance in excess of the $5,000 tax-advantaged limit as standard taxable income to the employee.
Making/Changing Elections: Documentation of Events
- The Section 125 rules do not require any specific substantiation procedures for an employer to confirm that an employee has experienced a permitted election change event.
- An employer may opt to rely solely on the employee’s certification that the event has occurred—without any form of documentation beyond the certification to support the event, except in situations where the employer has reason to believe that the certification is fraudulent or otherwise incorrect. In that situation, the employer must require supporting documents to substantiate the event before implementing the requested election change
In any situation, the employer should:
COVID-19 IRS and DOL Guidance on Cafeteria Plans
- Apply the approach consistently (i.e., require supporting documents or not consistently)
- Keep a record of the employee’s certification of the event (e.g., the benefits administration system’s record of the employee verification of the event) for all election changes is where the employer has reason to believe
As COVID-19 continues to impact many regulations on employee benefit plans, we encourage you to review the recent Internal Revenue Service (IRS) and Department of Labor (DOL) guidance on cafeteria plans.
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