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Overpayment of Dependent Care FSA Claims


Guest akwallace
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Guest akwallace

I have a scenario I need some advice on:

A Dependent Care FSA participant elects $5,000 for the Plan year. He contributes $5,000 via payroll deduction. Due to the timing issues with status changes, he has a qualified family status change that reduces his FSA to $4,500. He receives a payroll refund for the $500, but the FSA administrator had already paid out the full $5,000 in claims.

The FSA administrator attempts to collect the $500 overpayment, by March 31 of the following calendar year, but the employee does not repay.

Does the $500 become taxable income to the employee in the following calendar year, or does the employer just write this off as uncollected debt?

Thanks.

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This response assumes that the salary reduction refund was effective. In other words the $500 refund "worked" under the cafeteria plan rules. I am not sure if the attempt worked.

There are two $500 amounts. One $500 amount was a payroll refund. That means the employee had salary reduced by $4500. The $500 "refund" is taxable pay -- salary was not reduced by the original $5000. Of the orginal $5000, the employee includes $500 in income and $4500 is not included because of section 125.

The other $500 is the amount of childcare assistance that the employer provided to its employee. That $500 is not taxable to the employee if it is provided under the employer's childcare assistance program that qualifies under section 129. You can argue either way, but I would argue that the $500 was not provided under the program because the terms of the program say that the employer would provide the $4500 elected by the employee. Therefore section 129 does not protect the employee from taxation. The employer provided $500 that is deductible as compensation and the employee got $500 of childcare benefits taxable as compensation. And all of this appears to have occurred in the same taxable year of the employee.

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