Dependent Care FSA deducted in error

[Bunsen]

An employee, who was in our Dependent Care FSA plan that ended 6/30/2016, did not make an election for the plan year beginning 7/1/2016. The deduction was not removed from payroll and continued to be deducted from the employees pay. This administrative error did not come to our attention until calendar year 2016 was over. What is the proper procedure to correct this error including filing corrected returns?

[Bill Presson]

I think it's strictly a payroll error. I'm pretty surprised the employee didn't notice it.

The payroll company should advise on the best way to correct.

[jpod]

A payroll administration error, but not a tax error.  Employer owes employee money.  If it is paid back in 2017, it will be subject to tax and associated withholding in 2017.  It's no more complicated than that.  

[jpod]

Just a further note.  I was commenting only with respect to tax/benefits issues.  If the relevant state has a broad wage payment and collection law the employer may have some exposure to penalties or other liabilities for the late payment of the employee's wages/salary, in which case there may be something which should be done before or in connection with the late payment to mitigate that exposure.  Only a lawyer well versed in such a law and able to confer with the employer directly can help on that.   

[Bunsen]

Thanks, since it crosses over the quarter and year-end it affects our employer quarterly tax returns as well as the employees W-2 and income tax filing for the year. I wish it were as easy as your first response. We'll seek out the advice of an expert in this area.

[jpod]

I don't understand your point.  It only "affects" your 941s and the W-2 and "income tax filing" (I assume you mean the employer's income tax return) in the sense that you paid the employee less in compensation in 2016 than you should have paid, and therefore the unpaid amount should not be reflected on any of those filings.