Dependent Care FSA/under-withholding

[Guest twinlaw]

Employee properly elected an amount to be withheld in 2009. Due to administrative error, withholding did not occur through the full year and the full elected amount was not withheld. What are the options the employer has to put the employee in a neutral position (as if the full amount was withheld in 2009)? Thanks!

[LRDG]

In order for the ER to make the EE 'whole', as thought the DCFSA election was administered according to the EEs elected amount, depends on how payroll deductions were administered and also how respective DCFSA claims/reimbursements were administered. A couple of possibilities come to mind, for example if the per pay period amount was correct but only withheld for 6 months instead of 12 months of the plan year; or if the amount was keyed incorrectly, for instance $2,000 annually was entered instead of $2,500 annually.

Were DCFSA claims paid/reimbursed according to the incorrect payroll deducted amount; or were DC claims paid/reimbursed based on the correct EE elected amount?

In order to correct the payroll error, issue amended W-2 to reflect the correct EE annual election amount. Make appropriate adjustments to withholdings for Federal, FICA, State and Municipal if applicable, and any other required state and/or local, municipal withholdings.

Collect from the EE participant the difference between the amount actually withheld to fund the DCFSA and the correct amount based on EEs DCFSA election, less Federal, FICA, State, Local, Municipal tax withholdings owed to EE based on the election adjustment.

If claims have been paid/reimbursed based on the incorrect amount withheld from payroll, process eligible EEs claims up to the correct annual elected amount.

If claims have been paid/reimbursed based on the EEs correct annual elected amount, and the error was limited to one involving only payroll DCFSA deductions, it seems no Claim adjustments are necessary, provided all paid claims were otherwise eligible and paid based on the correct EE election.