Two employers and exceeding the $5,000 limit

[Guest Ladybug]

Suppose an employee is hired midyear and signs up for $3,000, then, later, the employee mentions he/she signed up and had $3,000 deducted from previous employer.

The employee will have $6,000 deducted pre-tax when only $5,000 is an allowed deduction for the year. Can the employee change the current deduction to correct the error (without a family status change)? If not, what happens to the employee at the end of the year?

[Lisa Hand]

Clarification - Is the question concerning the Dependent Care Assistance FSA?

[Guest Ladybug]

Yes, this is a dependent care FSA.

[KIP KRAUS]

When a new employee signs up for a dependent care FSA, it is my opinion that it is the Plan Administrator's obligation to make sure that the new employee does not exceed the legal limits for deductions. If deductions have already begun, you should automaticaly make an appropriate adjustment and notify the employee of the problem. I don't feel that a change in family status even comes into play in this particular situation.

[Lisa Hand]

Kip is correct, this is not a situation which involves change of status.

The deducations should be adjusted to comply with the IRC in any situation which is discovered not in complaiance and it should be clearly documented and any excess contributions run through payroll and taxed. While the employer (administrator) should make sure that enrollment documentation clearly states the Plan and IRC limits, it is the employee's responsibility to disclose the earlier participation.

One other way to address this issue is to detail in the Plan Documents that any participation for periods of less than 12 months is pro-rated, thus the maximum any participant (who is married filing jointly or head of household) can take is for the DCA is $5,000 annually or $416.66 per month.