Can an employee cancel his dependent care election if free child care becomes available?


One of your employees would like to drop his dependent care assistance program (DCAP) election under your calendar-year cafeteria plan because he has been offered free child care. Is this allowed?


Yes, as long as the plan document allows for this change. Cafeteria plans may permit mid-year election changes due to changes in cost or coverage. The rules apply broadly to DCAPs, permitting mid-year election changes in a variety of circumstances involving changes in care or in the cost of care.

According to IRS regulations, a cafeteria plan may automatically make a prospective increase or decrease in an affected employee’s elective contributions where the cost of a qualified benefit plan increases or decreases during the period of coverage. In addition, IRS officials have informally commented that a DCAP election change is permitted when a child is switched from a paid provider to free care.

Other circumstances where IRS rules permit a DCAP election change include changes in the hours for which care is provided and changes in the fee charged by a provider. However, an election change is not allowed if a cost change is imposed by a care provider who is the employee’s relative as defined in IRS rules. Also note that these rules do not apply to health flexible spending arrangements (FSAs); this is one of several areas in which the rules differ for health FSAs and DCAPs.

Source: IRS Reg. §1.125-4(f)(2).

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