September 21, 2005
Guidance on New Grace Period and DCAPs
On September 7, 2005 , the IRS issued Notice 2005-61 addressing one of several important issues created by the new claims grace period for cafeteria plans. Notice 2005-61 addresses the reporting requirements for dependent care assistance programs (“DCAPs”) that have adopted grace periods.
Grace Periods. In Notice 2005-42, the IRS announced that cafeteria plans can reimburse participants for claims incurred during the 2½ months following the close of a plan year. The creation of this grace period raises a number of issues regarding how the grace period interacts with various other rules under the Internal Revenue Code. Some of those issues were identified in our Alert dated July 11, 2005 .
DCAP Reporting. Sponsors of DCAPs are required to report the total amount of cash reimbursement furnished to an employee during the calendar year on the employee’s W-2. Because employers often do not know the amount of reimbursement furnished under the plan by the time the W-2 must be provided, in 1989 the IRS issued guidance indicating that the employer may report a reasonable estimate of the total amount. Generally, a reasonable estimate is the amount contributed to the plan by the employee through salary reduction, plus any employer matching contributions.
It was unclear how this reporting rule applied to plans that adopt the new grace period. However, in Notice 2005-61, the IRS confirmed that even for those plans that adopt the new grace period, a reasonable estimate that may be reported on an employee’s W-2 is the salary reduction amount elected by the employee for dependent care assistance during the calendar year (plus any employer matching contributions). This rule applies regardless of whether the employee has funds available at the end of the year to be used during the grace period.
If you have any questions regarding your reporting obligations with respect to a DCAP, please contact us.