IRS Information Letter 2020-0002 (Mar. 31, 2020)
Available at https://www.irs.gov/pub/irs-wd/20-0002.pdf
The IRS has issued an information letter that responds to an inquiry regarding whether an employee’s dependent care expenses “during the tax year” can be reimbursed if they were incurred before the employee became eligible to participate in the DCAP. The letter explains that expenses incurred before an employee becomes a participant are not eligible expenses, and that cafeteria plans may pay or reimburse only substantiated expenses for benefits incurred on or after the date the employee is enrolled in the plan.
EBIA Comment: This IRS information letter does not break new ground or include any surprises. But like several other recent letters (for example, see our Checkpoint article), it may be helpful to those on the front lines of cafeteria plan administration, who are sometimes asked to explain the reasons for plan operating rules and decisions. While not mentioned in the letter, employers and administrators should keep in mind that expenses are incurred when the medical or dependent care giving rise to the expenses is provided, and not when the employee is formally billed, charged, or pays for the service or item. Thus, services or items that were provided before an employee was covered by a DCAP or health FSA are not eligible for reimbursement, even if the bill is received or paid after participation has begun. For more information, see EBIA’s Cafeteria Plans manual at Sections XX.G.2 (“Health FSAs: Cannot Reimburse Prior to Plan Adoption or Employee’s Enrollment”) and XXIV.K.3 (“DCAPs: Cannot Reimburse Prior to Plan Adoption or Employee’s Enrollment”).
Contributing Editors: EBIA Staff.