DCA Election Change

As a general rule under IRS Section 125, Dependent Care Account (DCA) elections are irrevocable for the duration of the plan year. However, participants may change their mid-year election through their Human Resources department if they experience a qualifying life event and meet the IRS Consistency Test.

1. Qualifying Change in Status Events

A participant can alter their DCA annual contribution if they experience any of the following events:

• Legal Marital Status: Marriage, divorce, legal separation, annulment, or the death of a spouse.

• Number of Dependents: Birth, adoption, placement for adoption, or the death of a dependent.

• Employment Status: A change in employment status for the employee, spouse, or dependent (e.g., starting or terminating a job, transitioning from full-time to part-time, taking or returning from an unpaid leave of absence, or a change in worksite).

• Dependent Eligibility: A child reaches age 13 or otherwise ceases to qualify as an eligible dependent under IRS guidelines.

• Residence: A change in the home address of the employee, spouse, or dependent.

2. The Consistency Test

An election change cannot be made simply because a life event occurred; it must also satisfy the Consistency Test.

🔍 The Rule: The requested election change must be on account of, and directly correspond to, a status change that impacts the participant's actual dependent care expenses.

• Proper Application: If a dependent passes away or ages out of eligibility, the election may be decreased or canceled. However, the participant cannot use that event to cancel coverage for their other remaining eligible dependents.

• Spousal Coordination: If an employee gains eligibility under a spouse's employer plan due to marriage or a spouse's new job, the employee may decrease or cancel their current DCA enrollment only if coverage is actively being picked up or increased under the spouse's plan.

3. Cost and Coverage Rules Unique to DCAs

Unlike Health FSAs, Dependent Care FSAs feature flexible rules regarding changes in care costs or providers:

• Provider Cost Changes: If a childcare provider increases or decreases their rates, a participant may adjust their election to match the new cost.

  • Exception: Cost-based election changes are not permitted if the childcare provider is a relative of the employee.

• Provider/Coverage Changes: Switching childcare providers (e.g., moving from an onsite center to a private nanny or a new daycare facility) is considered a significant change in coverage. The participant may revoke their old election and create a new one to reflect the new provider's pricing.

• Time Limitations: While IRS regulations do not establish a strict federal deadline for submitting a mid-year change after an event occurs, employers typically enforce a plan deadline (usually 30 or 60 days from the event date).

4. Compliance Scenarios and Examples

Scenario A: Dependent Ages Out (Loss of Eligibility)

• Situation: Employee A has a $4,000 DCA election for their only child. Mid-year, the child turns 13.

• Ruling: Change Allowed. Turning 13 means the child no longer satisfies the IRS definition of a "qualifying individual." Because this directly cuts the employee's eligible expenses, they may cancel their DCA election.

Scenario B: Changing Childcare Providers

• Situation: Employee B has a $3,000 DCA election to use an onsite corporate daycare. Mid-year, they find an independent provider they prefer and withdraw the child from the onsite center.

• Ruling: Change Allowed. Shifting to a new provider represents a significant change in coverage. The employer's plan can permit the employee to revoke the original election and set a new amount matching the new provider's fees.

Scenario C: Reduction in Care Hours

• Situation: Employee C employs a household nanny at an annual cost exceeding $5,000. Mid-year, the child begins school, and the nanny’s hours are cut in half, reducing the annual care cost to $4,000.

• Ruling: Change Allowed. The reduction in the care provider's working hours is a valid change in coverage. The employee may legally reduce their DCA election to $4,000.

Scenario D: Standard Provider Rate Raise

• Situation: Employee D utilizes an independent household nanny who is not a relative. Mid-year, Employee D gives the nanny a raise, increasing annual costs from $4,000 to $4,500.

• Ruling: Change Allowed. A raise for an independent provider constitutes a significant increase in cost. The participant is permitted to increase their annual election to $4,500 to offset the adjustment.

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