Correcting dependent care expenses that are not eligible under the Pla

[Guest Joe Vasko]

If an employee participated in the dependent care plan for 2001 and relized after the end of the Plan year that his daycare expenses were not eligible because his wife did not work, how do you handle rectifying the problem.

Do you issue him a 1099 for 2001 based on the amount withheld for daycare? Can you issue him a 1099 in 2002 for the 2001 calendar year? What is the correct procedure?

Thanks...

[mroberts]

You would 1099 them before taxes have to be filed for the year 2001.

[jpod]

I don't think the previous response is correct. Dependent care reimbursements are not subject to tax withholding and are not to be reported as taxable wages on the W-2 if "at the time of" the reimbursement it "reasonable to believe" that the employee will be able to exclude such payment or benefit from income under Section 129 of the Code. Section 3401(a)(18). That is, if it was "reasonable" for the employer to believe that the reimbursement would be excludable, regardless of what the employee knew or didn't know at the time.

[Kirk Maldonado]

I disagree with both JPOD and mroberts.

The issue isn't whether withholding applies; it is whether or not the amounts are taxable. The fact that amounts are not subject to withholding is not dispositive as to whether or not the amounts are taxable.

I think that the amounts should be reported on an amended Form W-2. (I think that the correct name for the form might be W-2C.)

[mroberts]

I apologize if I'm off. I asked the guy next to me and he works on flex plans 24/7/365. I will have to beat him with a stick when he comes in.

[jpod]

If there's no withholding required there is no W-2 reporting. Section 6051 reporting is linked to 3401 withholding.

[GBurns]

What is the relationship between the spouse not working and the expenses for dependent care not being eligible? remember you are addresssing a DCAP not a Schedule A.

Box 1 of a W2 carries all wages, salary etc regardless of whether any amount was withheld or taxed unless specifically excluded by some other provision of the Code or reportable elsewhere.

[SLuskin]

For expenses to be eligible for a DCAP, either the employee must be a single parent, or both spouses must be gainfully employed (or else a fulltime student or unable to care for him(her)self.

[Guest SheilaLuken]

I don't think the employer makes a correction in this case. The employee needs to complete form 2441 with their federal taxes. In Part III of that form, line 13, the employee needs to enter their total qualifying expenses. In this employee's case it would be zero. Ultimately what will happen is that his dependent care benefits will be added back in to his line 7 income, thereby becoming taxable. If the employer issues a 1099 or other correction, the employee could end up being double-taxed.