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Overpayment of Dependent Care FSA


Sally
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We have made payments to an employee on her dependent care FSA claims in error as her account was not funded to cover them.  She is now leaving the organization and wondering if we can recoup the funds paid in error from her last paycheck?

Thank you!

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I  believe leevena's answer is almost certainly going to be correct, but it assumes that in fact this was not an "error," but rather just a consequence of the rule in the Section 125 regs that the entire annual amount elected by the participant was required to be credited to her account as of the first day of the plan year, even though salary reductions were to occur periodically. Was that the case here, or was their actually an "error," e.g. you reimbursed more than the participant had elected for the year?

Luke Bailey

Senior Counsel

Clark Hill PLC

214-651-4572 (O) | LBailey@clarkhill.com

2600 Dallas Parkway Suite 600

Frisco, TX 75034

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Leevena, I'm curious as to why you think the employer can't recover this amount. This is a dependent care FSA, not a health FSA, so there's no uniform coverage rule. Check the terms of the plan, but usually a dependent care FSA says it will only reimburse expenses to the extent that there's funding in the account (i.e., amounts withheld from participant's pay minus prior reimbursements).

I would treat this the same as any other unpaid indebtedness from an employee to the employer, e.g., if the employer had overpaid the employee in a particular pay period. I think getting the employee's consent is crucial since it may be required under state wage withholding rules. 

Always best to check with legal counsel familiar with state wage and hour laws before withholding amounts from employees' pay.

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JWK raises a good point. I assumed was a health FSA that included dependents. If was a DCAP account, no uniform coverage required, but getting funds back could be difficult practically. Also, would the DCAP be covered by ERISA or state law wage laws for this issue? A lot of complexity for what is likely a small amount.

Luke Bailey

Senior Counsel

Clark Hill PLC

214-651-4572 (O) | LBailey@clarkhill.com

2600 Dallas Parkway Suite 600

Frisco, TX 75034

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1 hour ago, JWK said:

Leevena, I'm curious as to why you think the employer can't recover this amount. This is a dependent care FSA, not a health FSA, so there's no uniform coverage rule. Check the terms of the plan, but usually a dependent care FSA says it will only reimburse expenses to the extent that there's funding in the account (i.e., amounts withheld from participant's pay minus prior reimbursements).

I would treat this the same as any other unpaid indebtedness from an employee to the employer, e.g., if the employer had overpaid the employee in a particular pay period. I think getting the employee's consent is crucial since it may be required under state wage withholding rules. 

Always best to check with legal counsel familiar with state wage and hour laws before withholding amounts from employees' pay.

Pass the spatula to remove the egg on my face.  Sorry, but did not read the question correctly.  I read it as medical, not dependent care.  So I agree with your comments, especially the last part about checking with counsel. 

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Assuming the employer can take it out of the last paycheck, either because the employee consents in writing or it legally can be done without consent, keep in mind that the employer must treat the mistaken payment as fully taxable.  If it cannot be taken out of the last paycheck, and the employer decides not to try to collect it, then it is an extra taxable amount with respect to which the employer did not withhold and deposit taxes, including the employer share of FICA/Medicare.  Also, there would be additional taxable income attributable to the employer funding of the employee share of FICA/Medicare.   An amended 941 might be necessary.    

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