dependent care question - please help!

We have an employee whose husband is off on worker's comp. Our FSA TPA is saying that she can't qualify for dependent care while he is off work. I know that you don't qualify if one parent stays home under normal conditions, but what if the parent is home because of injury or illness? Just because you are home does not mean you are able to care for your children. The child in this case is under 1 year of age and requires a lot of time and energy. The parent has a serious foot injury and has trouble walking or doing anything mobile. Thus the child is in daycare while mom works.

I assumed this situation would be covered. I also assumed an FMLA case would be covered, as long as the parent was unable to care for the child on a full time basis. Am I wrong? If I am wrong, does this mean the money withheld while the spouse is on worker's comp is lost to the employee, or can we refund it?

If I am right, can someone point me to the regulation?



  • 13 Comments sorted by Votes Date Added
  • Go to the Irs web site and look at IRS Publication 503 Child & Dependent Care Expenses.

    Your TPA is mistaken. If the spouse is out of work & physically or mentally unable to care for the child, then the childcare should be paid.

    Hope this helps.

  • Yikes Cherrye! I looked up 503 and what I found sounds more like the TPA is correct.

    From Publication 503:
    Temporary absence from work. You do not 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.


    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 is not a short, temporary absence, and your expenses are not considered work-related.


    The statements about the spouse seem to relate to them being the dependent covered and not as a parent:

    Qualifying Person Test
    Your child and dependent care expenses must be for the care of one or more qualifying persons.

    A qualifying person is: ...........................

    2. Your spouse who was physically or mentally not able to care for himself or herself and lived with you for more than half the year, or ............

    I think I must have been really confused and the TPA is correct, though it doesn't seem right to me.

    Now what? Do I refund the employee since it never should have been withheld in the first place? I knew the spouse was on worker's comp from the beginning, and if I had been up on my regs would have stopped the FSA contributions immediately.

  • Hi Nae,
    I think you're mis-reading 503. The Qualifying Person Test is used to determine who you may USE pre-tax dependent care dollars for -- so, if your spouse were not able to care for themselves under the guidelines of 503, then you would legally be able to use dependent care for help in paying expenses for their care. It has no impact on the situation you have described, especially since your employee is still working, not the one at home.

    Hope this helps.

  • Thanks Pattie. It hit me this morning that in the example the employee herself wasn't working. In our situation the employee is working, and needs daycare to continue to work.

    I still need to find the regs to show it to our TPA. Everything I find on the IRS website points me to Pub. 503 which has not been as helpful as I hoped.

    Any other suggestions?
  • Go back to the Pub 503 and look under the work related expense test, if you haven't already:

    Working or Looking for Work
    To be work-related, your expenses must allow you to work or look for work. If you are married, generally both you and your spouse must work or look for work. Your spouse is treated as working during any month he or she is a full-time student or is physically or mentally not able to care for himself or herself.

    Without knowing long the spouse has been out of work, I think a determining factor will be the length of the spouse's absence. If it is short, by IRS definition, there is no change in the eligibility of the expenses. Alternatively, if the absence is long as far as IRS is concerned, there is a difference in deductibility of the expenses.

    If the husband is on an unpaid leave from work for a time that meets the 'long' definition, your employee may have a qualifying event that would permit her to change her elections until such time that he can return to work. His return, then, would be another qualifying event that would allow her to increase her deductions again. Changing the amount of her deductions would be consistent with the change in status.

    Other input?
  • Thank you all so much for your input! I tried calling the IRS but after 2 phone calls and a long wait they ended up disconnecting me. After reading 503 so many times, I agree with stilldazed.

    The employee just got married in April, but the new spouse has been on work comp since Dec (he was run over by a forklift). The employee increased her deductions at the time of the marriage as she simultaneously changed her sitter. I assume we should have reduced it to zero for DCAP once they married. Since I didn't understand the law and let her make her elections, is this considered a clerical error so I can go back and return her money to her? Or are the funds lost? There is quite a bit involved.

  • We had a similar situation a few years ago, and I can't point to all the research I did then, but I did find that employers have a little more flexibility with the childcare FSA than with medical FSA. We reimbursed. I think I would in your case as well.
  • Thank you! Thank you! Thank you!

    I now have one more wrinkle (GRRRR!). The employee lived with her spouse prior to the actual marriage. I don't think the time prior to marriage matters as far as the IRS goes, but my boss thought that any adult in the household (even a sister, etc) would have an impact. I reviewed 503 (AGAIN!!!), but I don't see anything about other adults in the home (except those providing paid childcare). Has anyone heard of this?
  • Trying to sort the issues:

    1. Mom/worker was unmarried single mom paying for childcare & elected FSA.
    2. Mom has live-in companion, child goes to daycare, mom & companion are unmarried for IRS purposes. Unmarried by your state law, as in no common law marriage?
    3. Companion is not working and present in home while child is staying in daycare
    4. Mom & companion eventually marry (qualifying event), and companion/husband continues in home not working
    5. Mom/worker now wants to get reimbursed for daycare expenses incurred before & after marriage
    6. Supervisor now questions whether expenses are reimbursable because there could have been free childcare in the home???

    Do I have it?

    If I do & after doing a little more research, I think the following:
    1. Mom's costs as a single, working mom are deductible and should be reimbursed. I don't think that the companion's presence in the home is relevant. IRS would require the companion to be the spouse in order for Mom's expenses not to be eligible. He was not the spouse, and she need childcare to work. Had mom chosen to pay him, which she could have as an in-home caregiver to her child, her expenses would still be deductible.
    2. When Mom and companion married, she had a special enrollment period and could have dropped her contributions if she had wanted to and wasn't given the opportunity by her employer. Spouse was not working at the time and could (conceivably) been available to provide care, thus eliminating her childcare bill. Mom could not have paid the husband (not allowed by IRS), and had she understood that her childcare expenses were no longer reimbursible, she may have changed her contribution. Consequently, due to adminstrative/clerical error, she could be due reimbursement.
    3. At which time the husband returns to work after unpaid leave, Mom would have another special enrollment period and could conceivably begin her deducations to the FSA again (had she been given the opportunity to drop them at the time of marriage). At that point, both Mom and the husband would be working again, would need the childcare, and the expenses would be eligible again.

    If I have the correct picture, I think there is a potential liability issue with the employer for not offering the special enrollment option at the time of marriage, though there may be no way to know for sure unless you were challenged (hopefully you won't be). I think I'd reimburse under two separate trains of thought:
    1. childcare needed & paid for by a single parent prior to Mom's marriage. Why: One of the IRS publications or Q&As mentioned that the parent does not have to choose the least expenses childcare, which leads me to believe that Mom in this case would also not have to choose free care at home with a companion. Part of the intent of the credit is to ensure confidence with the parent that the child's safety/wellfare are secure while the parent works. For all we know, Mom may have deliberately chosen to take the child to childcare vs. leaving the child at home. I think IRS gives her that opportunity without penalty if she happens to choose to pay for care, which moves the issue away from how much and what the quality of care is to an issue of whether the expenses (regardless of how much they are) are deductible.
    2. reimbursement of post-marriage childcare expenses. Why: Mom probably should have been given an opportunity at the time of marriage to adjust her contributions. Whether she would or would not have is probably irrelevant. The point would be that she could have and didn't get the opportunity.

    Did you call IRS for input?

  • This is enough to make one consider changing careers. :-S

    I think you have all the facts correct.

    Employee now tells me that though she separated from her ex-husband ages ago, they did not officially become divorced until shortly before she remarried. She did not meet the requirements for common law marriage in this state. I think this takes care of the early part of the year.

    First I am going to talk to the IRS (one way or another!). Then, unless I learn something new from them, I will refund the employee her withholdings from May 1st (when we got the new election) to current. She has received DCAP reimbursements already for the period of Jan. 1st through April. When her husband begins actively looking for work (they closed the facility where he was working when the accident happened), she can complete a new election form. I am assuming here that his looking for work initiates a status change. That will be one more thing I verify with the IRS, if I ever get to actually talk to someone.

    Thank you so much everyone, especially stilldazed, for your input.

  • Please post the IRS response. I'd like to know their take on what employers should do in these circumstances.

    Happy to help. This forum was one of a few training tools available I used often a few years back when I jumped into the deep end of the pool, making my splash in HR, & I'm very grateful to all those who helped me cut my teeth in the field (and bang my head, fall down, pick myself up, . . ., etc.). Aside from the pearls of wisdom shared in the postings, the research was available on a 24/7 schedule!!! Anyway, if there is anyone out there as green as I was, and I can't believe there is, maybe they'll find the discussion helpful.

    best wishes.
  • Be Afraid.


    The people who work for the IRS are handling our government's income. Very SCARY.

    Last week the last person I spoke to told me I needed to talk to an Individual tax person who concentrates on withholdings. Then they tried to transfer me and I was eventually disconnected.

    This week I tried to start where I left off, but the person in Individual tax I talked to told me that I must talk to a corporate tax clerk. I was eventually connected to a Mrs. C. I told her I needed to talk to someone regarding employee withholdings, but she asked me what about because perhaps she could help me. When I told her it was about an FSA DCAP she responded, "F..S..A.....That's flexible spending accounts, right?" I knew I was in trouble.

    She had to do some research and put me on hold. After a lengthy wait she came back and rattle off a lot of publication and form numbers. The upshot was that we had to leave the withholding as it was, and that the employee should complete the proper forms at year end and PAY TAXES on the funds she never got. I confirmed that she believed the employee should get this double whammy, and then gave her an example of an error and how it was normally handled. I asked again if this isn't how I should handle it. She left to go do research again.

    After another lengthy wait she came back and told me this was a technical question and got my phone number and address so they can do more research and get back to me (within 10 days).

    I have no confidence that the answer I get will be correct since I have no confidence that Mrs. C even understood the facts of the matter.

    I called our TPA who informed me that I should return the money to the employee, and that it should be taxable income. I am going to do so today.
  • Thanks for the update. No wonder we do so much of the research ourselves and have so much confidence in resources such as this forum!

    The up side is that in case your organization is audited, IRS may not recognize your reimbursement. If they do, it may take years to sort out whether it is proper by IRS definition--we could all be retired by then.

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