Dependent Care annual maximum

[Guest Raven4th]

Our plan year runs 1/1 through 12/31. An employee just contacted me yesterday (June 7) to say that both she and her husband have elected the annual maximum $5000 for dependent care. She is requesting to stop her contributions because their combined contributions YTD will reach $5000 by July. As of June 1st no claims had been paid by our TPA from her DCAP account.

Has anyone ever encountered this situation before? How did you/would you proceed? Thanks for your input.

[Guest nherkowitz]

I don't believe you have any basis for stopping the dependent care withholding from your employee. There isn't a change of status here.

If there is no change of status, your employee should continue to submit expenses to the plan as she normally would, as she is still a plan participant.

They will still have to pay income tax on the $5,000 excess. What will happen at the year end, is that the amounts that end up on Form W-2 are reconciled in Part III of the Child & Dependent Care Form 2441, as part of their annual Form 1040 income tax return. This form will end up showing that $5,000 should be added back to the employee's income. They will then be taxed on the $5,000 excess.

The other place I would look is in the plan document as she may have made an unallowed election. If that is the case, though you would probably have to go back to the beginning of the year and reverse all of the deductions.

[jmor99]

Here's my opinion: since the law won't allow more than 5,000, one of the spouses elections is null and void.

1) Get proof that the other spouse has indeed made a 5,000 election-- that might include a copy of the election form and a copy of a payroll check receipt showing the deduction.

2) Add your employees total deductions to date back to her total gross, w-2 income.

3) Put a note documenting all of this in the employee's file (in the event of an IRS audit).

You MUST get proof that the spouse has indeed made the same election. Sometimes employees will tell you a tale like this just to get off the hook.

[Guest Raven4th]

Thanks to you both for great responses. Have a great day!