mistake in allocation to fsa

[Guest blackacre]

Is there a remedy when someone mistakenly allocates deductions to an account for which she is not eligible or has no use? A client put $1300 in a dependent care account thinking that she could use it for her disabled husband's medical expenses. She didn't realize that it is for "day care" type expenses. Can she get the money back as taxable income?

[Sandra Pearce]

As an employer, I would look at the materials given to the employee when the election was made. If the materials stated clearly that the dependent care account was for "day care" expenses and the form stated "day care" expenses I wouldn't be able to reimburse the funds because the employee didn't understand that medical expenses would not be eligible.

[Guest blackacre]

I haven't found any formal guidance on this but have found informal comments from an IRS spokespwoman where she talked about classic cases of mistake and gave as an example when someone had a dependent care account but the child was an adult. In my case, the woman has no children yet had $1300 in a dependent care account. When there is "clear and convincing evidence that an error has been made, the employee can be allowed to correct the mistake." In the case of true mistake, "the apropirate correction is made by undoing the mistake, as of the date it occurred." Sharon Cohen, Senior Attorney, IRS. Employee Benefit Plan Review, June 1998, p.46.

[Lisa Hand]

The Employee Benefits Institute of America's (EBIA) 125 Legal guide has a very good discussion of this is as well. Some documentation should be used as well as a statement from the employee stating she that she meets the impossibility standard as well as understands she can not make this mistake again in the future.