Mechanics of dependent care FSAs?

I have both. The health care (HSA) reimburses in full. You spend $5000 in January, you get it all back. If you leave or are let go, you owe nothing.

Dependent Care (DCA) does not reimburse in advance of deposits. If childcare cost $5000 for january, you get checks each week for $100, soon after the regular paycheck.

Both accounts are "use it or lose it", so I'm sure there's some forfeited money that goes back to the plan. One is allowed to change deductions based on a short menu of life events, regardless of amounts already reimbursed, so you have a baby in January, and somehow burn through the money, but the baby allows you to stop withdrawals. Sneaky, but this is how the plans are written. A small company may just refuse that change request. My child was born in October, and the administrator dragged her feet so deductions only stopped for the month of December. She admitted I was the only employee in a company of 100,000 to pull this stunt, but they had tens of thousands in forfeited money each year. JOE

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While my own experience with health care FSA mirrors what was posted so far, is it safe to assume that ALL cafeteria (section 125) plans operate this way? In other words, is it written into tax law or is it at the discretion of the plan provider? Joetaxpayer's example clearly shows that each company can violate the spirit if not the letter of the law pretty much at will.

At any rate, unlike health care expenses, the nature of dependent care is that it is normally paid for based on the passage of time (by the hour or day, whatever) so it would be uncommon in the real world to get too far ahead of contributions. And as I recall without looking it up, you can only get a tax benefit for care provided in the current year, in other words you can't pre-pay or post-pay and get a deduction.

As a financial planning issue, this opens all sorts of tangential questions... such as, if one knows one is going to quit a job, should one plan to get a reimbursement in excess of contributions? Or, even without quitting, could one somehow bank the "premature" (advance) reimbursement and at least earn interest on it?

-Mark Bole

On average the benefit probably goes to the business, but for medical FSAs you can claim on the entire year's money on 1/1, terminate employment on 1/2, and not have to reimburse it.

Back to the question about DC FSAs, I can corroborate your statement. You only get reimbursed for claims as you contribute to the balance by payroll deduction.

This would take muck foresight. The plan I am most familiar with has an annual 'signup' in October when one must decide the amount for the next year. As we agree (and Chris confirmed in his reply) the HSA will reimburse in advance of paycheck deposits but not in advance of expenses. So there no opportunity for interest, but there is one for someone with a known early year change event and known expense. e.g. A baby due in late January. There's a high expense, and the change in family status lets you change withdrawals. e.g.2 One knows they will quit in February. So they load up on prescription glasses in January, and quit after reimbursement. (Disclaimer - I'll repeat my caution, that for a small company doing this may be less than ethical, purposely planning to pocket what isn't yours)

JOE

I think so, but cannot cite law to corroborate that.

I've been searching. I am unable to find an IRS reg/pub that spells this out.

I've found

handles this for companies, but of course, this and another examples can't prove the negative, only the regs canJOE