Our company will be acquired and therefore all of our employees will be terminating our current company and will be hired by the acquiring company. In regards to our Dependent Care Account, can current participants who are contributing change their contribution amount based on this acquisition being out of their control? We would not want anyone adversely affected by the acquisition. Employees will be eligible to elect new Dependent Care contributions under the new employer.
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Thank you for your inquiry regarding participants being allowed to change the contribution amount to their dependent care accounts in advance of a company acquisition.
As you are likely aware, generally FSA elections cannot be changed in the middle of the plan year except in very limited circumstances as set forth by the IRS Section 125 regulations. For example, IRS regulations do permit changes to FSA elections in the event of qualifying life events such as marriage, divorce, birth, death, and change in employment.
It is then generally up to the benefits provider to decide and set forth in the Summary Plan Description under which circumstances participants will be permitted to make election changes to the specific FSA/Dependent Care Account in question. In other words, not all plans and providers permit election changes under all of the permissible IRS circumstances.
With this information in mind, however, a 2002 IRS Revenue Ruling (old, yet still cited and pertinent) notes that employees who are transferred as part of an asset sale acquisition have experienced “no loss of eligibility for coverage” and, therefore, “transferred employees continue to be subject to their existing FSA elections and may not change those elections during the remainder of the plan year of the asset sale.” (Pages 1069 – 1070).
Fortunately, because the IRS also believes that employees should not be penalized as a result of acquisitions, that Revenue Ruling goes on to offer two methods for transferring employee contributions from the seller’s FSA to the buyer’s FSA.
These methods are explained in a more approachable manner in this article and may provide some options for you to discuss with your benefits providers and the executives and counsel who are negotiating the acquisition.
In summary, though it is unlikely that your employees would qualify for a change in election status to their dependent care accounts (unless some other approved qualifying event occurs), your company may be able to structure a transfer of those funds to the acquiring employer’s comparable dependent care account.
Your benefits providers and Summary Plan Descriptions will be the best source of further assistance for helping design a transfer of benefits that best serves the needs of your transferring employees.
If one of these methods of transfer is not an option, your current benefits provider will also be able to provide information on whether your participants’ current plan includes a grace period or run-down/spend-down period during which participants will be allowed to file claims and use remaining funds in the FSA.