QUESTION: A participant in our company’s DCAP has a child who will turn 13 during 2023. The DCAP is offered under our cafeteria plan, and both the DCAP and cafeteria plan are calendar-year plans. The participant and spouse are both employed full time, and the child attends an after-school day-care program. Can any of the child’s 2023 after-school day-care expenses qualify for reimbursement from our DCAP?
ANSWER: Otherwise-eligible expenses can be reimbursed to the extent they are incurred before the child’s 13th birthday. This is because a DCAP can only reimburse expenses for care of a qualifying individual. One way for a DCAP participant’s child to be a qualifying individual is to be a “qualifying child” who has not attained age 13. In general, a qualifying child is someone who (1) bears a specified relationship to the employee (an employee’s child is included, as are certain other relationships); (2) has the same principal place of abode as the employee for more than half of the year; (3) meets certain age requirements; and (4) does not provide more than half of his or her own support for the year. According to IRS regulations, a person’s status as a qualifying individual is determined on a daily basis. An example in the regulations indicates that a person who ceases to be a qualifying individual on February 1 is treated as a qualifying individual through January 31.
Assuming that the child meets the requirements for being a qualifying child of the participant, your company’s DCAP can reimburse expenses for the child’s care to the extent the expenses are incurred before the child’s 13th birthday and otherwise qualify for reimbursement under the plan. For this purpose, an expense has been incurred when the dependent care services giving rise to the expense have been provided. In other words, regardless of how the participant is billed (e.g., weekly, monthly, or quarterly), the DCAP can only reimburse services that are provided before the child’s birthday. Expenses incurred on or after the child’s 13th birthday will not be eligible for reimbursement (although a child who is physically or mentally incapable of self-care might continue to be a qualifying individual after attaining age 13). The permitted election change regulations for cafeteria plans allow participants to cancel or decrease their DCAP elections when a child turns 13 to adjust for the child’s ceasing to be a qualifying individual, provided the plan document has been drafted to allow such a change.
For more information, see EBIA’s Cafeteria Plans manual at Sections XXIV.B (“Checklist for Reimbursing an Expense Under a DCAP”), XXIV.F (“Expenses Must Be for ‘Care’”), XXIV.G (“Care Must Be for a ‘Qualifying Individual’”), and XXV.I (“Selected DCAP Design and Administration Issues: Midyear Election Changes”).
Contributing Editors: EBIA Staff.
