Dependent Care FSA

[Guest benefitsanalyst]

We have an employee who enrolled in the Dependent Care FSA with a plan year beginning June 1, 2006 and they are now coming to us stating they enrolled in error and that his spouse stays home with his kids. Can we refund him his contributions to this plan given the fact that he enrolled in error. If so, how do we handle contributions from 6/1/06 - 12/31/06 that were reported on his W2?

[QDROphile]

Although you can probably correct mistakes, you have to be convinced to a high degree that the enrollment was really an error and the length of time before the question was raised is not a helpful fact. What other evidence do you have to support the claim of error?

[Guest benefitsanalyst]

Thanks for your response.

Probably the fact that he is a very highly paid individual within the organization and it would make complete sense that he wouldn't need daycare. Plus, this is the first year he elected this in his 5 years with the company.

[QDROphile]

Is he blind, illiterate, or too important to read forms? So far, I'm not convinced.

If he elected $5000 of health FSA benefits for the last 5 years and failed to elect any health FSA benefits in the year he first elected $5000 childcare FSA benefits, it would be a better story.

[LRDG]

It's a judgment call. Is his explanation believable? If your plan is audited, will your supporting documentation and explanation be believed by an IRS auditor?

I have allowed a plan participant to do this, 3 years consecutively. The participant was elderly, with grown children my mother's age, who thought he was electing medical coverage for his dependent (spouse), when making the dependent care election. It was in the first years of the plan and each year our enrollment/election forms were a bit different from the prior year. The participant was totally believable, a spotless 30yr employment history with the company, provided a certified written request/statement.

If you allow the participant to revoke the election, you must withhold payroll taxes that would have otherwise been paid on that amount, refunding the balance. Issue an amended W2.

DO KEEP IT CONFIDENTIAL.

[QDROphile]

LRDG's situation was easy. It was impossible for the employee to use the elected benefit, so it was easy to conclude that the election was a mistake. I don't think "belief" in the participant's story is ever enough by itself if the story only relates to intent.

[Guest CassieG]

If the spouse is not employed or a full-time student, the employee would not be eligible for the dependent care under the regs, anyway. I would probably allow the change with a letter certifying this.

[JanetM]

If the spouse doesn't work they are not eligible for dependent FSA. I would fix it. But I agree with QDROphile, is the guy blind, illiterate or too lazy to read the instructions?

[Guest Guest99]

I don't think that being a highly paid employee in any way supports the argument that the election is an obvious mistake. If anything revoking an election for a highly paid employee might highten scruitny.

If for # prior years the spouse didn't work, and there was no child care expenses and no DCFSA election, then it's conseivable the '06 election was just a mistake. If there has been no attempt to file claims and no denied or claims disuptes for DCFSA claims during the year might support the argument in favor of revocation.

If enrollment forms or language in communications material changed from prior years, or a new option under the FSA, a new administrator from prior years, anything different in '06 from prior year that may have contributed to confusion and explain the mistake.

I think it's gotta be more substantial proof than s/he doesn't need dependant care because s/he's highly paid. Many of the highest annual elections in plans I'm familiar with are made by highly paid 2 income households who would elect more than $5k annually if allowed to do so.

[MARYMM]

It's a judgment call. Is his explanation believable? If your plan is audited, will your supporting documentation and explanation be believed by an IRS auditor?

I have allowed a plan participant to do this, 3 years consecutively. The participant was elderly, with grown children my mother's age, who thought he was electing medical coverage for his dependent (spouse), when making the dependent care election. It was in the first years of the plan and each year our enrollment/election forms were a bit different from the prior year. The participant was totally believable, a spotless 30yr employment history with the company, provided a certified written request/statement.

If you allow the participant to revoke the election, you must withhold payroll taxes that would have otherwise been paid on that amount, refunding the balance. Issue an amended W2.

DO KEEP IT CONFIDENTIAL.

We had a similar situation where the ee elected dep. care for a calendar year plan and did not notice her error until filing her tax return in April of the following year when she questioned Box 10 on her W2

So far, we have not reimbursed the ee. My position was that if the error had been reported prior to 12/31, we could have corrected it - either reimbursed the contributions or reclassed them to Medical FSA if that was the actual intention of the election. By the time the issue was raised the claims runout period had ended, so reclassing was not a viable option. (Although I have had a TPA allow an extension to a claim period - but it had to be offered to all ee's

I'm uncomfortable with the concept of reimbursing the ee in the current calendar year and issuing a W2c for the prior year. In that scenario the compensation would actually be received in the current year and therefore is being deferred - which is contrary to Sec 125 regulations.

[LRDG]

Any retroactive corrections must apply to the plan year (or tax years for non calendar plans), in which the error was made, the compensation was earned and excluded under the FSA.

Amended W2 should be issued for the corresponding year, and adjustments to corresponding payroll tax withholdings.

oops on post #9.