Author Topic: Day Care/Dependent Care FSA and cap for "highly compensated" earners?  (Read 1234 times)

jeromedawg

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Hey all,

Can someone help explain the "highly compensated" employee contribution limit with the Day Care FSA? At my company the contribution is $2500 if you're "highly compensated" (which is like $125k or more or whatever)... otherwise, it's $5000. I'm having trouble finding a straightforward answer/explanation Googling around as well as attempting to read the IRS's 503 related publication. Anyone familiar with the policies around this? It seems like it might vary company to company...unless that was just past years. But I can't find a 'clear-cut' outline from the IRS stating that it's $2500 if you earn $125k or more - unless I'm glossing over something...?
« Last Edit: January 07, 2020, 10:52:54 AM by jeromedawg »

honeybbq

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Re: Day Care/Dependent Care FSA and cap for "highly compensated" earners?
« Reply #1 on: January 07, 2020, 10:52:53 AM »
OK, I'm not an expert, but this seems like a local company policy. I'm not sure I understand why though. My spouse is highly compensated but claims the full amount. Are you sure it's not the split between each partner being $2500? Maybe put in a call to HR because to me that doesn't sound right.

jeromedawg

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Re: Day Care/Dependent Care FSA and cap for "highly compensated" earners?
« Reply #2 on: January 07, 2020, 10:55:58 AM »
OK, I'm not an expert, but this seems like a local company policy. I'm not sure I understand why though. My spouse is highly compensated but claims the full amount. Are you sure it's not the split between each partner being $2500? Maybe put in a call to HR because to me that doesn't sound right.

That's exactly what I'm curious about. The most definitive thing I've found is here - https://www.investopedia.com/articles/pf/09/dependent-care-fsa.asp:
"The IRS limits the total amount of money you can contribute to a dependent care to $5,000 each year for married couples filing jointly, unmarried couples and single individuals and $2,500 if you are married and filing separately."

They make no mention of "highly compensated" employees there and base the amount you can contribute on your filing status. This is why I'm confused... when I signed up for this last year, I thought I was able to contribute the full amount until HR contacted me and said I'm limited because I'm "highly compensated".
As a side note: it's disappointing the contribution amounts don't increase as you enroll more kids in day care/dependent care. For more than one kid, it's not very helpful but I'll get what I can take I suppose...
« Last Edit: January 07, 2020, 10:57:47 AM by jeromedawg »

mm1970

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Re: Day Care/Dependent Care FSA and cap for "highly compensated" earners?
« Reply #3 on: January 07, 2020, 11:13:26 AM »
It's probably a company thing.  I use ours, but then again, I'm not highly compensated (I keep getting close...then the bar changes).

Long ago and far away I was an HCE for a year when I sold stock, and there was no change in my FSA. 

However, now one kid has aged out and the other one has decreased his annual cost to $2000 a year, so win!

jeromedawg

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Re: Day Care/Dependent Care FSA and cap for "highly compensated" earners?
« Reply #4 on: January 07, 2020, 01:43:37 PM »
It's probably a company thing.  I use ours, but then again, I'm not highly compensated (I keep getting close...then the bar changes).

Long ago and far away I was an HCE for a year when I sold stock, and there was no change in my FSA. 

However, now one kid has aged out and the other one has decreased his annual cost to $2000 a year, so win!

Yea, I spoke with the benefits admin and they said it's not really mandated or regulated by IRS and because it's an 'optional' benefit companies can offer, they can sort of set the number to whatever they want.

honeybbq

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Re: Day Care/Dependent Care FSA and cap for "highly compensated" earners?
« Reply #5 on: January 07, 2020, 01:53:51 PM »
It's probably a company thing.  I use ours, but then again, I'm not highly compensated (I keep getting close...then the bar changes).

Long ago and far away I was an HCE for a year when I sold stock, and there was no change in my FSA. 

However, now one kid has aged out and the other one has decreased his annual cost to $2000 a year, so win!

Yea, I spoke with the benefits admin and they said it's not really mandated or regulated by IRS and because it's an 'optional' benefit companies can offer, they can sort of set the number to whatever they want.

Bummer. Can your spouse utilize the other 2500 and file separately? Or your spouse take the whole 5000?

jeromedawg

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Re: Day Care/Dependent Care FSA and cap for "highly compensated" earners?
« Reply #6 on: January 07, 2020, 01:59:19 PM »
It's probably a company thing.  I use ours, but then again, I'm not highly compensated (I keep getting close...then the bar changes).

Long ago and far away I was an HCE for a year when I sold stock, and there was no change in my FSA. 

However, now one kid has aged out and the other one has decreased his annual cost to $2000 a year, so win!

Yea, I spoke with the benefits admin and they said it's not really mandated or regulated by IRS and because it's an 'optional' benefit companies can offer, they can sort of set the number to whatever they want.

Bummer. Can your spouse utilize the other 2500 and file separately? Or your spouse take the whole 5000?

Nope, they limit you to $2500 total regardless of the number of people in the household. If my wife held a job that offered Day Care FSA she could prob do that as well, but she's SAHM (actually, she has a contracting position with a friend of her who she helps with admin stuff but obviously no benefits there)

Need2Save

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Re: Day Care/Dependent Care FSA and cap for "highly compensated" earners?
« Reply #7 on: January 07, 2020, 02:05:42 PM »
Benefits Manager over here.  Correct, if a company has previously failed non-discrimination testing and found their dependent care FSA to be favoring the highly compensated employees, they can impose a lower contribution limit on to the HCEs to ensure they will pass future year non-discrimination testing.  Although the IRS allows employers to offer the top value of $5,000, an employer is not obligated to do so.  This testing is based on ridiculous terms using only a person's compensation and contribution level company-wide.  No regard to number of children, or age of the employee, or age of the children (except you normally can't use a DCFSA for over age 13 children to begin with). 

I totally agree with you as well that $5,000 is nowhere need what many working parents need to fund dependent day care and the cap has not changed to keep up with inflation.

It sucks for the employees for sure.  As someone above mentioned, you may be able to do $2,500 through your company and $2,500 through a spouse if that applies and get to the $5,000 anually between you both.   

By the way...If your spouse is a legit full-time stay at home parent, you would not be eligible to use a dependent day care FSA. Both spouses must be working full-time or going to school full-time. If she has earned income (taxable) through her consulting gig, then you are probably okay.   

ericbonabike

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Re: Day Care/Dependent Care FSA and cap for "highly compensated" earners?
« Reply #8 on: January 08, 2020, 07:15:34 AM »
I used to make that much money and didn't have any problems putting $5k into my Dependent FSA.   But I work for an engineering firm and probably 25% of the company made more than me.

mm1970

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Re: Day Care/Dependent Care FSA and cap for "highly compensated" earners?
« Reply #9 on: January 08, 2020, 03:15:33 PM »
Quote
By the way...If your spouse is a legit full-time stay at home parent, you would not be eligible to use a dependent day care FSA. Both spouses must be working full-time or going to school full-time. If she has earned income (taxable) through her consulting gig, then you are probably okay.   

Yes, this.  Dependent care FSA is used for child care to allow both parents to work or go to school. 

La Bibliotecaria Feroz

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Re: Day Care/Dependent Care FSA and cap for "highly compensated" earners?
« Reply #10 on: January 08, 2020, 03:53:33 PM »
Quote
By the way...If your spouse is a legit full-time stay at home parent, you would not be eligible to use a dependent day care FSA. Both spouses must be working full-time or going to school full-time. If she has earned income (taxable) through her consulting gig, then you are probably okay.   

Yes, this.  Dependent care FSA is used for child care to allow both parents to work or go to school.

He said the wife does some contracting.

Proud Foot

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Re: Day Care/Dependent Care FSA and cap for "highly compensated" earners?
« Reply #11 on: January 09, 2020, 02:53:02 PM »
It sounds to me like it is a company policy they put in place due to failing the nondiscrimination compliance testing. This is from Zenefits
Quote
Dependent Care FSA Sec 125 Compliance Testing
In addition to the Eligibility, Benefits, and Key Employee Concentration tests, Dependent Care FSAs must satisfy the following tests:

  • More Than 5% Owners' Concentration Test: requires that more than employees who own more than 5% of the company may not receive more than 25% of the total benefits distributed by the Dependent Care FSA.
  • 55% Average Benefits Test: requires that the average amount of benefits provided to Non-Highly Compensated Employees (NHCEs) must be at least 55% of the average benefits provided to HCEs. All non-HCE and HCE employees, including those who are not participating in the program, are used in this calculation.

mm1970

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Re: Day Care/Dependent Care FSA and cap for "highly compensated" earners?
« Reply #12 on: January 09, 2020, 05:55:26 PM »
Quote
By the way...If your spouse is a legit full-time stay at home parent, you would not be eligible to use a dependent day care FSA. Both spouses must be working full-time or going to school full-time. If she has earned income (taxable) through her consulting gig, then you are probably okay.   

Yes, this.  Dependent care FSA is used for child care to allow both parents to work or go to school.

He said the wife does some contracting.
Yes, and that counts...sort of.  It gets really complicated with contracting and part time jobs.  Although chances are, the IRS is never going to audit you for that.  (If you pay for care for 5 days a week for your child, but only work 3 days per week, technically the only time that "counts" for FSA are the 3 days per week.  Assuming that 3 days a week is an option for your childcare.)  Similarly, if you pay for year-round care for your child, but only work 3 months, you can only claim FSA for the 3 months that you work.

https://www.irs.gov/pub/irs-pdf/p503.pdf

Need2Save

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Re: Day Care/Dependent Care FSA and cap for "highly compensated" earners?
« Reply #13 on: January 10, 2020, 07:41:17 AM »
My concern was he also called her a "SAHM" implying (possibly) that she did not work outside the home. Then the 'contracting' for a 'friend' in my mind may have meant, it's an under the table kind of arrangement. Some couples are not aware of the 'both spouses working FT or going to school full time' rule so I felt it was worthwhile to mention it.

As usual, mm1970 provides good context and IRS references.