FSA Over contribution

Benefits dept found that an employee had overcontributed to FSA ( 2022 )because of an employer error (having 2 deductions  for FSA, 1 was not end-dated). It is now 2024, how does payroll refund the employee?  

You mean the employee exceeded the $2,850 health FSA salary reduction contribution limit in 2022?

In that case, the guidance says to return the excess contributions as taxable income in the year of the correction (2024).

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.

Yes, the employee over contributed in 2022. So, I would enter this correction in 2024 not 2022?

Yeah I copied the guidance above: 

22 hours ago, Brian Gilmore said:

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.