[UCRDBR] DepCare FSA Plan Change to Pre-Taxable Contributions for Highly-Compensated Employees

[Departmental Benefits Representatives]

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March 8, 2022

To:
Department Benefit Representatives
From:
HR Benefits Office on behalf of UC Office of the President
Re:
2021 DepCare FSA Plan Change to Pre-Taxable Contributions for Highly-Compensated Employees
Certain benefits programs, including UC's Dependent Care Flexible Spending Account (DepCare), are given favorable tax treatment under Internal Revenue Code Sections 125 and 129. Because Flexible Spending Account (FSA) plans offer these tax benefits, they are highly regulated by the IRS.

To ensure non-highly compensated employees receive their share of the tax benefits offered through the plan, the IRS requires employers to conduct non-discrimination testing (NDT). The non-discrimination rules are generally designed to prevent plans from allowing highly paid individuals to benefit at a higher percentage than non-highly paid individuals.

In 2021, UC's DepCare Flexible Spending Account plan did not comply with one of the IRS Non-Discrimination Tests.

To rectify this situation, some of the contributions made to the DepCare FSA by highly-compensated employees in 2021 will be reported to the IRS as taxable wages on their 2022 W-2 form. This change does not affect the taxable income reported on affected participants' 2021 W-2 forms or their 2021 income tax filings.

Contributions to the 2021 DepCare plan account in excess of the new pre-tax amount, for which participants have not yet been reimbursed for claims, will be refunded, less applicable payroll taxes. Refunds will be issued by UCPath no later than April 30, 2022.

Information about this change will also be posted on UCnet before a communication is sent to affected participants on Friday, March 11.

In the future, UCOP will be notifying 2022 DepCare FSA participants via email and postal mail that UC reserves the right to modify their election amounts mid-year in order to ensure compliance with IRS non-discrimination rules.

For questions, contact the UCPath Center at (855) 982-7284 for further assistance.
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