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If a worker makes contributions to a dependent-care Flexible Spending Account, and that worker expects she will be on maternity leave for a portion of the year, much of which will be "unpaid", what is the best way to handle the FSA contributions and reimbursements? Is there a way to step-up contributions now, while income is being generated, or is the only option to use paid time off to "buy" continued contributions to the FSA?

Note: The worker's dependent care expenses for the "partial" year will exceed the IRS cap for dependent-care contributions, so we're good there.

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4 Answers 4

At my company, you can make changes to your FSA within 30 days a "qualifying change in family status." That can include change in marital or partner status / employment, birth or death of a family member, starting or ending unpaid leave, etc. It is limited to two changes per calendar year.

A worker could set a high total yearly value at the beginning of the year (payments will be divided by number of total paychecks per year), suspend during the leave, then optionally start again with a different amount after returning from leave. The worker just needs to make sure the entire amount in the FSA account will be used if the company doesn't allow any rollover.

In my own case, I didn't bother to use an FSA last year because I was going to be on a mix of paid and unpaid maternity leave (first pregnancy) and didn't want to deal with it on top of everything else.

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"A worker could set a high total yearly value"...unfortunately, the IRS cap would prevent us from increasing our contribution level. And I question if a pregnancy qualifies as a change in family status (the birth obviously would qualify, but we haven't gotten "there" yet). –  Jeromy French Jan 30 '13 at 20:10
    
@JeromyFrench, ah, so you're already maxed out. My company includes going out on leave--so that could be the first event. –  mkennedy Jan 30 '13 at 20:15

According to the IRS Section 125 document (clicking the link will download a PDF, then see paragraph c, which starts on page 15) the birth of a child is a "qualifying life event". Pregnancy does not entitle you to increase the total amount you contribute to your FSA, but you seem to know that.

Maybe I missed something, but I've not found any IRS rules about increasing contributions now to compensate for a lack of contributions later in the year. That said, my experience is that FSA contribution amounts per paycheck are locked in when the employee finalizes their election prior to the start of the plan year (unless one of those life changing events occurs). However, since I didn't find a regulation to that effect, it may be possible to make such a change.

You suggested using paid time off to continue making contributions if it's not possible to increase them before unpaid time off. That should work if the employee has sufficient PTO to cover their time off. If they don't have that much PTO here are a couple other suggestions - unfortunately I don't know if these are permitted with FSA's:

  • They may be able to use an amount of PTO less than their regular workload to keep making FSA contributions.
  • The employee may be allowed to make out-of-pocket contributions (i.e. they directly pay into their FSA fund) during that unpaid time.

Generally speaking, the FSA plan administrator (either internally or at the agency providing the benefit) should be able to provide more help.

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The rate per paycheck you selected during open season is the rate that you have to work with until your next life event, or the next plan year. The IRS only lets you adjust the rate after these life events. Because of the 30 day window that the IRS gives you to make the change, you probably should file the paperwork while you are on maternity leave.

Consult with HR to see what happens to your paycheck when you are on Leave without Pay status. After the birth of your child, you can increase the rate to make sure you get the maximum for the year.

For example:

  • 26 checks at $150 a check is $3900 for the year.
  • 10 checks at $150, then 4 checks at $0 while on leave, then 12 checks at $200 also equals $3900 for the year.

The one hitch is that you can only get reimbursed up to the amount you have contributed. You are never allowed to let the fund go negative. But once you get back to work, you will be able to submit the bills for the period you were on leave.

There were questions on the money SE site regarding if the company could require a person to reimburse the company if they spend more than what was collected, but less than what was pledged for the medical FSA. But they don't seem to apply to the dependent care FSA.

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up vote 0 down vote accepted

Yes, there is a way to step-up contributions now, you just have to ask your FSA vendor (in our case, after thinking about it for a month they realized they couldn't think of a reason to prevent it).

From the FSA vendor:

[the FSA vendor] advised that [my wife can be allowed] to accelerate her dependent care deductions prior to going out on leave up to the $5,000 household limit (or $2,500 if married filing separate tax returns). Her dependent care FSA election will need to be used for daycare expenses incurred before or after her leave of absence. Daycare expenses incurred while she is out on leave are not eligible. Please see the pre-pay options in the attached Election Change form.

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