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Exceeded FSA Contribution Limit


susieQ

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I have not encountered this problem previously. 

An employee elected $3,050 for 2023 FSA.  During 2023, the employer began using direct deposit for payroll.  The result of the direct deposit is that the payroll company processed the 01/01/2024 payroll early, December 29, 2023.  The 01/01/2024 compensation and deductions are now included for all purposes in 2023.  So the participant that elected the $3,050 FSA for 2023 has now deferred $3,200 for 2023.  

It seems to me this is an excess contribution. Does it need to be distributed to the participant as such? 

Thank you. 

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If those contributions from the 12/29/23 payroll are attached to the 2024 plan year (i.e., available only for expenses incurred on or after 1/1/24), I think you could reasonably take the position that the contributions were not attributable to the 2023 plan year and therefore did not exceed the 2023 limit.  

Otherwise, the more conservative route would be to treat this as an excess contribution that's taxable in 2024 when refunded.

IRS Notice 2012-40:
https://www.irs.gov/pub/irs-drop/n-12-40.pdf

If a cafeteria plan timely complies with the written plan requirement limiting health FSA salary reduction contributions as set forth in section IV, below, but one or more employees are erroneously allowed to elect a salary reduction of more than $2,500 (as indexed for inflation) for a plan year, the cafeteria plan will continue to be a § 125 cafeteria plan for that plan year if (1) the terms of the plan apply uniformly to all participants (consistent with Prop. Treas. Reg. § 1.125-1(c)(1)); (2) the error results from a reasonable mistake by the employer (or the employer’s agent) and is not due to willful neglect by the employer (or the employer’s agent); and (3) salary reduction contributions in excess of $2,500 (as indexed for inflation) are paid to the employee and reported as wages for income tax withholding and employment tax purposes on the employee’s Form W-2, Wage and Tax Statement (or Form W-2c, Corrected Wage and Tax Statement) for the employee’s taxable year in which, or with which, ends the cafeteria plan year in which the correction is made.

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