On September 7, 2005, IRS released IRS Notice 2005-61 clarifying W-2 reporting for Dependent Care Assistance Plans (DCAPs) with 2 1/2 month grace periods as allowed by IRS Notice 2005-42. This Notice is good news for employers wanting to allow their employees to use such a grace period.

Employers have been concerned about how to report dependent care benefits for an employee in Box 10 of their W-2 if that employee submits claims during the grace period.

In the past, employers have relied on IRS Notice 89-111 which allows an employer to report a reasonable estimate of the cash reimbursement the employee received for that year. The Notice went on to say that the amount of an employee’s salary reductions for a DCAP would be a reasonable estimate.

There was some worry that if a grace period were allowed for a DCAP plan that employers would have to start reporting actual reimbursement for the year rather than the amount of salary reductions. However, Notice 2005-61 clarifies the W-2 reporting requirements for DCAPs with grace periods. Employers can still rely on Notice 89-111 and report the employee’s salary reductions for a DCAP in Box 10 or their W-2.

DataPath, Inc. will be releasing an update to DPI-125 to allow administration of plans with grace periods for Health FSAs and DCAPs. The update will allow administrators apply the new extended grace period to both Flexible Spending Accounts (FSAs) and Dependent Care Assistance Programs (DCAPs). The update for users without Global Claim Processing (GCP) capabilities has an estimated delivery date of early November, and the update for users with GCP capabilities has an estimated delivery date of early December.

The administrator can also select whether or not to apply a grace period for each FSA or DCAP and, if a grace period is applied, the Administrator can choose to:

• Elect the standard 2½ month Grace Period or customize the length of the Grace Period.
• Allow the entire previous year's balance to be used in the Grace Period or allow a cap to be set on the amount that can be used.

You will be notified when the updates are ready.