QUESTION: One of our DCAP participants will soon take a ten-week maternity leave, following the birth of her second child. Her two-year-old child will be at home during this time instead of attending day care, but the provider will charge her half of the regular monthly fee to hold the child’s spot during the leave. Can our DCAP reimburse this fee?
ANSWER: Your participant’s hold-the-spot fee might be reimbursable as an indirect expense, but only after the child resumes receiving care from the provider. Under IRS regulations, application fees, agency fees, deposits, and similar expenses are considered expenses for care if they must be paid to obtain the related care. (The regulations refer to these as “indirect expenses” because they relate to the care of a qualifying individual but are not directly for care.) Although the regulations do not specifically address hold-the-spot fees of the type your participant has asked about, an IRS official has informally commented that a hold-the-spot fee may qualify as an indirect expense if it must be paid to obtain care when the leave is over.
The regulations further provide that indirect expenses will not be for care if the care is not ultimately received. Consequently, indirect expenses cannot be reimbursed unless and until the related care is provided (i.e., care with the provider is resumed). (Of course, all of the other requirements for reimbursement under the DCAP rules and the plan document must also be met.) The regulations do not indicate whether indirect expenses can be reimbursed in full as soon as the care commences or must be reimbursed proportionately over the duration of the agreement with the provider. Absent IRS guidance, the more cautious approach is to provide reimbursement over the agreement’s duration. For example, if a participant has a month-to-month agreement with a provider, it might be acceptable to reimburse the entire fee after the first month of related care has been provided. Absent formal guidance on this issue, some DCAP sponsors and administrators may decide not to reimburse hold-the-spot fees unless they fall within the regulations’ exception for expenses relating to short, temporary absences (e.g., for vacations or minor illnesses).
For more information, see EBIA’s Cafeteria Plans manual at Sections XXIV.F.4 (“Indirect Expenses May Be for Care”), XXIV.E.1.a (“Exception for Short, Temporary Absences”), and XXIV.B (“Checklist for Reimbursing an Expense Under a DCAP”).
Contributing Editors: EBIA Staff.