Deductions not wittheld

[Guest moseelig]

I have a participant who elected to participate in the Dependent Care Account ($5,000) for the 1/1/09 - 12/31/09 plan year; however upon review of the census data the client provided, no monies were withheld from this individual and he has been reimbursed the entire elected amount. What are their options...1099? Thanks.

[jpod]

Lots of moving parts here. If I understand the facts correctly, boiled down to its essence the employer screwed up by not withholding from pay, yet the employee got the full benefit of participation in the plan: tax-free reimbursements of dependent care costs.

If the employer is willing to eat its loss, then nothing needs to be done.

If the employer would like to get back from the employee the money it should have withheld from his pay during 2009, the first thing to do is to confer with employment law counsel, not necessarily an ERISA specialist, but someone who is very knowledgeable about employment law in the State in question. Does employer have a valid claim for reimbursement from the employee, and can the employer use some sort of self-help to recover it via reductions in the employee's future pay? If so, I think the employer can just reduce future pay until it recovers the overpayment, and those amounts will not be reportable on a 2010 W-2 or future W-2s or subject to withholding, and you just leave the 2009 tax reporting alone.

If that can't be done, and the employer and the employee negotiate some sort of pay back through other means, the tax issues from the employee's perspective become much trickier and too complicated to address in this venue.