Double dipping?

[Guest AEA]

If both spouses have employers with cafeteria plans, is it double dipping if each one signs up for the DCAP for the full $5,000 (meaning a pre-tax benefit for the family of $10,000)? Will the couple end up paying taxes on the amount above the current $6,000 credit limit?

Thanks

[Guest JerseyGirl]

Yes, they would be double-dipping. Since the error has now been discovered, one of the employers should refund the contributions ASAP – before the end of the year if possible – and withhold all appropriate taxes.

[Guest b2kates]

Jersey Girl,

I have a different take. Each employer is a separate entity and does not have any obligation related to the actions of the other. However, the 5000 is an annual overall limit per family.

At the end of the year, the employer is required to disclose on the W-2 the amount of Dependent Care. Exceeding the $5,000 limit will be accounted for on the taxpayers income tax return and the excess amount will increase their taxable income. Whether they need additional tax payments are part of the tax calculation.

I do not see this as an exposure for the the employer/plan sponsor. But maybe the parents did not read their enrollment information.

[papogi]

The only exposure to the employer by making no effort to police this is that they could be hit by the IRS for underwithholding. When the employee fills out his/her taxes (Form 2441), they will end up paying income tax on the amount which exceeds $5,000, but the IRS will never get any FICA or FUTA on that amount, and they won’t like that.

[Guest jfp]

The exemption from federal payroll tax withholding (and the employer's share of FICA/Medicare taxes) applies only if at the time of the DCAP reimbursement it is reasonable to believe that the employee will be able to exclude such benefit from income/wages.

Therefore, it's your classic facts and circumstances test. However, who is to say which $5,000 is excludable and which is not? I think the employer is pretty safe here, even if it's been told that the spouse has a plan too.