When an employee takes a leave of absence (LOA), protected (e.g. FMLA) or unprotected, they may no longer be eligible for reimbursements from their dependent care FSA (which IRS regulations call a “DCAP” = dependent care assistance program) during their leave. However, they may still be able to participate in the DCAP depending on their employer’s LOA policy.
There are 2 conditions required for dependent care expenses to be eligible for reimbursement:
- employee must incur the expense to enable the employee and the employee’s spouse to be “gainfully employed” – a facts and circumstances test
- the expense must be for the “care” of one or more “qualifying individuals”
In general, condition #1 is determined on a daily basis, however there are exceptions to the “daily basis” rule for certain, short, temporary absences (e.g. vacation, minor illnesses) and part-time employment.
This “exception” is based on the IRS regulations establishing a “safe harbor” under which an absence of up to two consecutive calendar weeks is treated as a short, temporary absence. However, whether an absence for longer than 2 weeks qualifies as short and temporary is determined on the basis of facts and circumstances.
Likewise, when it comes to FMLA, the IRS does not agree that one’s entire absence under FMLA (which guarantees eligible employees up to 12 weeks of unpaid leave for certain purposes) is appropriate as a temporary absence safe harbor, noting that an absence of 12 weeks “is not a short, temporary absence” within the meaning of the regulations. See Preamble to Treas. Reg. §§1.21-1 through 1.21-4, 72 Fed. Reg. 45338 (Aug. 14, 2007).
Although the employee may not be eligible to reimburse dependent care expenses while on leave, an employee on LOA may be able to continue to participate in (and make contributions to) a DCAP but any reimbursements from the DCAP will still be subject to the gainfully employed rule and would have to fall within the exception for short, temporary absences.
A DCAP (a non-health benefit) is not subject to FMLA continuation requirements, therefore it would be based on the employer’s policies regarding a leave of absence as to whether they are allowed to continue or revoke their election of “non-health benefits” under the cafeteria plan and how contributions are handled during an unpaid leave.
Employers need to understand the rules regarding DCAPs when an employee is on a leave, and make sure it was “reasonable to believe” that a expense is reimbursable or there may be adverse consequences (e.g. taxes, interest, penalties). Likewise, if using a third-party administrator, ensure that appropriate measures are being taken too, because in general the employer will ultimately be responsible for such procedures, both under the services agreement with the TPA and under governing law.