Dependent care benefits exceeded

[Guest jc1457]

Hi,

I am trying to figure out how to fix this. The participant had a new baby. She returned to work in Jan 2009 and elected the max $5,000 towards dependent care benefits. Her husband did the same with his employer. They have just realized they made a mistake.

I don't have a change in status now, so the participant must continue withholding. My questions is, what amount does the employer report on W-2 box 10? Is it the amount withheld during the year or the amount reimbursed? The employee does not have enough expenses to have the full amount reimbursed.

Thanks for your help!

[Guest sniffles]

You report the amount withheld from their pay.

[Guest jc1457]

You report the amount withheld from their pay.

That is what I thought. Can you please tell me if I have this right?

When I work through the Form 2441, it looks like you would add amounts greater than $5,000 to taxable wages on your Form 1040. In this couple's case - the amount withheld would be $10,000. The excess amount ($5,000) is added back to taxable wages. The excess amount cannot be refunded to the employee so essentially, the employee will pay taxes on salary that they never received.

Is this right? Is there any way around this. The employee says that with a new baby and returning back to work, that they made a mistake. She didn't realize her husband also made a dependent care election.

Thank you for your help!

[Guest sniffles]

That would be a question for the IRS.

[masteff]

When I work through the Form 2441, it looks like you would add amounts greater than $5,000 to taxable wages on your Form 1040. In this couple's case - the amount withheld would be $10,000. The excess amount ($5,000) is added back to taxable wages. The excess amount cannot be refunded to the employee so essentially, the employee will pay taxes on salary that they never received.

Might take another look at line 16 on that form... consider what amount would be forfeited.

You might walkthru the form w/ a different scenario... like electing $2000 and only using $1500.

[LRDG]

I have reversed both Medical and Depencent FSA elections due to participant error. I would only consider reversing the transactions if both participant and spouse each agreed to provide a sworn statement certifying an error was made that includes a credible explenation that substantiates the error. I would be curious about claims paid to each by the respective plans, curious if the same claims were filed and paid by both plans.

If a certified statement is provided and credible, I would reverse the $5k DCFSA deduction from the payroll system. Also reverse $5k paid claims from DCFSA claim system. Collect withholding taxes from the participant on the $5k, representing FICA, Fed, State and Municipal if applicable. For example, collect $1250 based on total withholding tax rate of 25% on previously pre-taxed payroll deduction of $5k. Issue corrected W-2.

I corrected elections two years consecutively for an elderly participant who confused dependent care expenses with dependent insurance coverage for his spouse the first *2* years the plan was in effect. He was working twenty years past retirement age with *dependents* preparing for their own retirements, obviously no infant care expenses, it was a mistake.

Form 2441 is the equivelant of the DC provider's W-2, is issued by the participants to the DC provider as their statement of income. DC providers typically expect to report the full $10k income on form 2441 in order to fully fund their own future SS retirement benefits.

Box 10 of form W-2 is for reporting 100% of DC benefits deducted by the plan. Boxes 1,3, and 5 on W-2 is for reporting amounts over the IRS maximum of $5k. This is what concerns me, one would assume plan sponsor is aware of the IRS max of $5k for DCFSA. Never the less, assume Box 10 reflects the plan withheld $10k, Boxes 1,3 or 5 would be used to report the IRS excess of $5k, which is taxable to the employee-participant when filing tax returns.

Most employers are aware of the $5k max for DCFSA elections, and one would assume or at least hope most ERs wouldn't deduct amounts over $5k. Why would IRS form and instructions include provisions for amounts over IRS max? Also, claim systems are not required to account for amounts paid, yet the potential for exceeding the $5k maximum exists as it does for Payroll deductions. Payroll deduction amounts and paid claim amounts aren't mutually exclusive.

In this particular case, neither plan exceeded $5k deductions or reimbursements, yet each participant received $5k tax free income and reimbursements. The W-2 works if for instance a participant elected and received $10k, the $10k is reported in Box 10, in which case Box 1, 3 or 5 reflects the amount that exceeds IRS maximum or $5k.

I'm somewhat baffled with IRS use of Box 10 on form W-2 to attempt DC corrections. W2 is a payroll system based form, and not representative of claims paid, yet the W-2 instructions refer to 'amounts paid'. In addition to the fact that ER is prohibited by IRS regs from exceeding the $5k DC max.

Maybe it's used when DC services are provided on site by the employer. Although I don't understand how that has any baring unless on site ER DC services are provided below fair market or free to EE and paid by the ER, with full FMV value of services reported in Box 10, FMV in excess of $5k max reported in Box 1,3,5, triggering amount taxable on individual return. This is beginning to sound like the most plausible explanation. Although it would seem 100% of Free DC is 100% taxable regardless of IRS max.

[Guest jc1457]

Thanks so much for all your help.