Can Our DCAP Reimburse a Participant’s Claim for a “Late Fee”?

QUESTION: One of our DCAP participants has submitted a reimbursement claim that includes a $20 “late fee.” This charge is in addition to the regular monthly day-care fee for the participant’s child and appears as a separate entry on the statement from the day-care center with no further explanation. Can we reimburse it?

ANSWER: It depends on what the charge is for. It could be for a “late pickup fee”—that is, an extra charge to continue taking care of a child who was not picked up from the day-care center on time. On the other hand, it might be a fee that was charged because the participant was late in paying the day-care center’s bill.

To qualify for reimbursement from a DCAP, an expense generally must be for the care of one or more qualifying individuals—the primary purpose of the expense must be to ensure the individual’s well-being and protection. Accordingly, if the charge is a late pickup fee, we think the fee can be reimbursed under your DCAP, so long as it is for taking care of the child and satisfies the other criteria for reimbursement under your plan and the Code. But if the charge is for late payment of a bill from the day-care center, it probably would not qualify for reimbursement from a DCAP. This is because a fee of this type is likely to be a penalty to discourage future late payments, and it would not relate directly to the child’s care. Although not official guidance on which employers can rely, the FAQs for the Federal Flexible Benefits Plan (which covers federal employees and includes a DCAP) list late pickup fees as eligible dependent care expenses and late payment fees as ineligible for reimbursement.

In any event, an employer must determine whether it is “reasonable to believe” that a particular DCAP expense is reimbursable, so you should ask the participant to provide additional substantiation. Note that a DCAP may be more restrictive in the type of expenses that are reimbursable or the individuals for whom they will be reimbursed, so long as applicable nondiscrimination requirements are met. You should be sure that your plan documents do not exclude reimbursement of this type of charge.

For more information, see EBIA’s Cafeteria Plans manual at Sections XXIV.F (“Expenses Must Be for ‘Care’”) and XXV.B (“How Can Employers Ensure That Only Employment-Related Expenses Are Reimbursed?”).

Contributing Editors: EBIA Staff.

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