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Med FSA unsubstantiated debit card claim in prior plan year for terminated employee


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First time to deal with this, so any help would be great. I've found and read  IRS Memo 201413006 that speaks to this, but it doesn't speak to the case where the employee has terminated employment in the prior year.  

Debit card was charged in plan year 2017 for $159.26.  Participant terminated employment 7/14/17 and received her 2017 W-2 at the beginning of 2018.   Third party FSA admin just notified us  at the end of the claim period and has stated that  they have sent notices and contacted the individual 3 times and suspended the debit card as required by the Memo above.  

But it looks like there were no other claims to offset and there are no future wages in 2018 to offset.   So the $159.26 would become income in 2018, right?  And the employer would just have to eat the both sides (employee and employer) of the (albeit small) FICA/FUTA amounts?  and the former employee would receive a W-2 from the employer for 2018?

Any one have to deal with this in the past that can tell me whether i am going down the correct path or not?



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I took a look at IRS Memo 201413006 as well and that appears to be sound guidance for your problem.  As you indicated, it does not cover the situation where there are no wages or other invoices to offset the overpayment.  I see at least one sticky problem with any alternative. 

When you pay the federal withholding, FICA, and state income tax withholding on top of the $159.26, you create a circular calculation since any withholding paid on top will also be considered as wages.  Usually, employers will go through one or two iterations at most, since each iteration results in a smaller addition.  In any case, I don't think there is any authoritative answer to this problem.  

You could perhaps try to calculate the wages and withholdings so that it totals $156.26, but I find that hard to justify since the former participant clearly has already received value of $156.26 without regard to the tax withholding.

The good news is that the amount is small enough that I doubt any taxing authority will challenge your decision.  So your participant did a good job of screwing his or her employer and getting credit for additional withholding.  The employer could pursue a collection action but the amount would not seem to justify it.  I wish I could offer more useful advice than this, but unfortunately the facts make that difficult.

See Part 4 of Publication 15-B for rules on withholding, depositing, and reporting for fringe benefits.  It mentions that the employer has a right to recover but in context that seems to imply an ongoing employer-employee relationship.


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thanks!  That's pretty much where we are. But I did find out from our FSA TPA that they had been sending all notifications/requests to her work email (from which she terminated about a year ago!)  I am not sure why it took them a whole year to send us the information but they did show me where on their system I could look for future issues to catch it earlier (not sure exactly what we are paying them for -- this is the 2nd "large" incident with them and I hope to change at plan year end to a different vendor)  They were totally unwilling to give any (non-legal) advice....

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