Library Worklife

Volume 3, No. 9 • September 2006

HR Law & Regulation

Definition of a Dependent Changes for Flexible Spending Accounts

By Dorothy Ragsdale

The Internal Revenue Service has provided an updated definition of dependent for individuals participating in a flexible spending account.

This includes new definitions for the following:

1. “Gainfully Employed”

The term “gainfully employed” includes employment within or outside the employee’s home but does not include work as a volunteer or for nominal consideration. Under the general rules for dependent care FSAs, employees must allocate their expenses for dependent care between days worked and days not worked.

The proposed regulations include an exception for short, temporary absences (e.g., 1 or 2 days) for a minor illness or vacation. The exception states that an employee who pays for expenses on a weekly, monthly or annual basis does not have to allocate expenses on a daily basis during these short temporary absences from work.

Also, if a part time employee is required to pay for dependent care on a weekly, monthly or annual basis that covers both days worked and days not worked, the employee is not required to allocate the expense on a daily basis.

2. “Qualifying Individual”

A qualifying individual is the employee’s dependent who is:

a dependent is defined in Internal Revenue Code Section 152 as someone who is under age 13; or
physically or mentally incapable of self-care and who has the same residence as the employee for more than one-half the taxable year; or
the employee’s spouse who is physically or mentally incapable of self-care and who has the same residence as the employee for more than one-half the taxable year.

For divorced or separated parents, a child is a qualifying individual of the custodial parent. The custodial parent is defined as the parent with whom the child lived for the greater portion of the year. Therefore, a non-custodial parent that pays for dependent care cannot be reimbursed for that expense under a dependent care FSA.

3. “Qualifying Expenses”

To qualify for reimbursement, expenses must be for the care of a qualifying individual. Expenses are considered as care for the individual if the primary function is to assure the individual’s well-being and protection. Amounts paid for food, lodging, clothing, or education are not considered “for the care of” a qualifying individual.

The regulations clarify a number of administrative issues:

Expenses for children in nursery school, pre-school, or similar programs for children below the level of kindergarten are considered to be for the care of the child. Expenses for kindergarten or higher grades are educational in nature and are not primarily for the care of a child.
Expenses for overnight camp are not employment-related expenses.
The cost of a day camp or similar program may be for the care of a child and an employment-related expense, even if the day camp specializes in a particular activity (e.g., music, computer, sports).
The cost of transportation of a child by a dependent care provider to the place where care is provided may be an eligible expense.
Indirect expenses that relate to but not directly associated with care for the child may be eligible expense if the employee is required to pay these expenses to obtain the care and the care is provided as a result of these fees. This can include application fees, agency fees, and deposits. Forfeited fees or deposits are not eligible expenses.

Visit www.irs.gov/individuals/article/0,,id=121435,00.html for more information.

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