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


Issue:

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?

Answer:    

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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