Dependent Care FSA During Summer Break

Question:  When are summer dependent care expenses reimbursable under the dependent care FSA?

Compliance Team Response:

Summer Day Camps: Eligible Expense

Day camps for qualifying individuals (generally children under the age of 13) are eligible expenses.  These expenses qualify even if the camp specializes in a particular activity, such as computers or soccer.

Important Timing Note: The dependent care FSA rules provide that an expense is considered incurred when the dependent care services are actually provided.  In other words, the expense is not reimbursable when the employee is billed, charged, or pays for the dependent care.  Rather, the expense is reimbursable only when the actual dependent care service is performed.

So even though the employee may have to pre-pay for the camp well in advance of the actual camp session, the expense will be eligible for reimbursement under the FSA only upon reaching the month in which the camp occurs.

Summer Overnight Camps: Not an Eligible Expense

Expenses for overnight camps are not considered employment-related expenses.  Therefore, overnight camp expenses are not reimbursable under the dependent care FSA.

Summer School: Not an Eligible Expense

Summer school costs at the level of kindergarten and above are considered educational expenses, not employment-related expenses.  Therefore, summer school expenses are not reimbursable under the dependent care FSA.

Spouse Not Working During Summer: No Eligible Expenses

Employees’ dependent care expenses are eligible for reimbursement under the dependent care FSA only if the expenses are “employment-related,” which means they enable the employee and spouse to be gainfully employed.

If an employee is married, dependent care expenses will qualify as “employment-related” only if:

  1. The employee’s spouse is gainfully employed;
  2. The employee’s spouse is in active search of gainful employment;
  3. The employee’s spouse is a full-time student; or
  4. The employee’s spouse is mentally or physically incapable of self-care with the same principal place of abode as the employee for more than half the year.

In situations where an employee’s spouse is not working during the summer (e.g., spouse is a teacher), the employee will therefore not have eligible employment-related expenses during the summer months.

There is a special exception providing that dependent care expenses incurred during a temporary absence from work may be considered “employment-related” (and therefore reimbursable under a dependent care FSA).  However, the absence is considered temporary only if it is no longer than two consecutive calendar weeks.  This temporary absence exception therefore does not apply for the typical summer break that is significantly longer than two weeks.

 

More Information on Eligible Dependent Care FSA Expenses

Regulations

IRS Publication 503:

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

Temporary absence from work.

You don’t have to figure your expenses for each day during a short, temporary absence from work, such as for vacation or a minor illness, if you have to pay for care anyway. Instead, you can figure your credit including the expenses you paid for the period of absence.

An absence of 2 weeks or less is a short, temporary absence. An absence of more than 2 weeks may be considered a short, temporary absence, depending on the circumstances.

Example.

You pay a nanny to care for your 2-year-old son and 4-year-old daughter so you can work. You become ill and miss 4 months of work but receive sick pay. You continue to pay the nanny to care for the children while you are ill. Your absence isn’t a short, temporary absence, and your expenses aren’t considered work-related.

Camp.

The cost of sending your child to an overnight camp isn’t considered a work-related expense.

The cost of sending your child to a day camp may be a work-related expense, even if the camp specializes in a particular activity, such as computers or soccer.

Education.

Expenses for a child in nursery school, preschool, or similar programs for children below the level of kindergarten are expenses for care.

Expenses to attend kindergarten or a higher grade aren’t expenses for care. Don’t use these expenses to figure your credit.

However, expenses for before- or after-school care of a child in kindergarten or a higher grade may be expenses for care.

Summer school and tutoring programs aren’t for care.

IRS Form 2441 Instructions:

https://www.irs.gov/pub/irs-pdf/i2441.pdf

You can include amounts paid for items other than the care of your child (such as food and schooling) only if the items are incidental to the care of the child and can’t be separated from the total cost. But don’t include the cost of schooling for a child in kindergarten or above. You can include the cost of a day camp, even if it specializes in a particular activity, such as computers or soccer. But don’t include any expenses for sending your child to an overnight camp, summer school, or a tutoring program.

Prop. Treas. Reg. §1.125-5(a)(1):

(a) Definition of flexible spending arrangement.

(1) In general. An FSA generally is a benefit program that provides employees with coverage which reimburses specified, incurred expenses (subject to reimbursement maximums and any other reasonable conditions). An expense for qualified benefits must not be reimbursed from the FSA unless it is incurred during a period of coverage. See paragraph (e) of this section. After an expense for a qualified benefit has been incurred, the expense must first be substantiated before the expense is reimbursed. See paragraphs (a) through (f) in §1.125-6.

Prop. Treas. Reg. §1.125-6(a)(4)(i):

(4) Reimbursements of dependent care expenses.

(i) Dependent care expenses must be incurred. In order to satisfy section 129, dependent care expenses may not be reimbursed before the expenses are incurred. For purposes of this rule, dependent care expenses are incurred when the care is provided and not when the employee is formally billed, charged for, or pays for the dependent care.

Treas. Reg. §1.21-1:

(c) Gainful employment.

(ii) Exception for short, temporary absences. A taxpayer who is gainfully employed is not required to allocate expenses during a short, temporary absence from work, such as for vacation or minor illness, provided that the care-giving arrangement requires the taxpayer to pay for care during the absence. An absence of 2 consecutive calendar weeks is a short, temporary absence. Whether an absence longer than 2 consecutive calendar weeks is a short, temporary absence is determined based on all the facts and circumstances.

(d) Care of qualifying individual and household services.

(5) School or similar program. Expenses for a child in nursery school, pre-school, or similar programs for children below the level of kindergarten are for the care of a qualifying individual and may be employment-related expenses. Expenses for a child in kindergarten or a higher grade are not for the care of a qualifying individual. However, expenses for before- or after-school care of a child in kindergarten or a higher grade may be for the care of a qualifying individual.

(6) Overnight camps. Expenses for overnight camps are not employment-related expenses.

(7) Day camps.

(i) The cost of a day camp or similar program may be for the care of a qualifying individual and an employment-related expense, without allocation under paragraph (d)(2) of this section, even if the day camp specializes in a particular activity. Summer school and tutoring programs are not for the care of a qualifying individual and the costs are not employment-related expenses.

(ii) A day camp that meets the definition of dependent care center in section 21(b)(2)(D) and paragraph (e)(2) of this section must comply with the requirements of section 21(b)(2)(C) and paragraph (e)(2) of this section.

 

Disclaimer: The intent of this analysis is to provide the recipient with general information regarding the status of, and/or potential concerns related to, the recipient’s current employee benefits issues. This analysis does not necessarily fully address the recipient’s specific issue, and it should not be construed as, nor is it intended to provide, legal advice. Furthermore, this message does not establish an attorney-client relationship.  Questions regarding specific issues should be addressed to the person(s) who provide legal advice to the recipient regarding employee benefits issues (e.g., the recipient’s general counsel or an attorney hired by the recipient who specializes in employee benefits law).

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