Content-Type: text/shitpost

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First some background. The U.S. government has a program called a “Flexible Spending Account” whereby some of your income is sheltered from tax and put into an escrow account, and can then be used to pay for either health or dependent care expenses, depending on the type of the account.

The catch is, you have to say at the beginning of the year how much money you want sequestered, and if you don't spend it all by the end of the year, it goes away completely. I don't understand why, but that is how it works.

So say your tax rate is around 40%. You commit at the beginning of the year to put $5000 into the account. Your salaried income is reduced by $5000, but you were only ever going to see $3000 of that anyway. Meanwhile you can still spend the $5000 on child care, so that leaves you $2000 ahead.

But suppose you made a mistake, and instead of having $5000 of child care expenses you have only $3000. Now that $2000 you saved is lost and goes back to the government, leaving you back where you started. And if your expenses were only $2500, half what you expected, you lose the surplus $2500 which puts you $500 behind where you would have been if you had skipped the whole exercise.

Anyway that is the situation I found myself in. The $5000 is not sequestered all at once, but evenly throughout the year, so I asked the HR person at my company if I could stop making contributions to the account immediately. She said:

Unless there is a qualifying life event, you are not able to make any changes until open enrollment.

Open enrollment is the end of the year when you tell them what you want to do for next year. A “qualifying life event” is something like a birth, a death, marriage, or divorce that substantially changes your situation; the IRS is willing to let you change your plans if something like this happens.

None of these seemed likely or practical. But I was galled at the thought of losing my money, so irritated that I took my mind off it by reading the relevant regulations. Some time later, I replied:

The IRS regulations (CFR 26, §1.125-4) say that an election may be changed mid-year if there are “significant cost or coverage changes” (Paragraph (f)). For dependent care plans, it is not immediately clear how this applies, but the IRS regulations provide several helpful examples.

In one of these (section (f)(6), example 5), an employee (“A”) elects to contribute $3000 to a DCFSA for employer-provided child care, but then finds a different child care provider and wants to revoke the election. The IRS says this is permitted:

The availability of dependent care services from the new child care provider … is a significant change in coverage similar to a benefit package option becoming available. Because the FSA is a dependent care FSA rather than a health FSA, the coverage rules of this section apply and [the employer's] cafeteria plan may permit A to elect to revoke A’s previous election of coverage under the dependent care FSA, and make a corresponding new election to reflect the cost of the new child care provider.

My situation is similar to this example. The reason for the decrease in my child care expenses is due to my child's transfer to a new school in a different neighborhood, effective next month. I was not aware that the time I made the election that my child would be changing schools. The old after-school care is no longer convenient, and we will need to make other arrangements for after-school care. I should be allowed to change my election to cover the cost of after-school care from the new provider.

Whom do we talk to about this?

Apparently this was the right thing to do, because shortly after, I got this reply:

Mark,

Thank you for providing the reason for your request to make changes to your dependent care. Did you want to completely stop your deduction for the dependent care for the remainder of the year or reduce it?

Dominus Wins!