USA Forfeited FSA (dependent care) funds

Jun 22, 2017
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United States
I'm new to the group and have a question!

We ended up with funds not spent in the dependent care flexible spending account for 2016. That is, one employee didn't use all her money.

The amount is large enough that we have decided to allocate it back to the employees that are enrolled in the dependent care FSA for 2017.

For ease of calculation - $1,500 excess. 5 participants for 2017. (The employee who left the money in 2016 is not enrolled in 2017.) Calculates to $300 per employee.

I'm a bit confused on how to handle (and our Plan Administrator and the IRS has been of no help).

I believe we need to reduce the 5 employee's contribution by the $300 for the rest of the year. ($300/ # remaining pay periods) Therefore, if they elected $5,000, we would only deduct $4,700 for 2016.

I believe we need to communicate this to the plan administrator - so that the $300 in funds are 'available' for reimbursement right away and the rest of the year's contributions are reduced. But the plan administrator still shows $5,000 as the elected amount and will still reimburse the employee the entire $5,000.

And here is where I get a little iffy. Besides reducing the deduction for the remainder of the year, do we need to do anything else in payroll? Given this scenario, the W-2 for this employee would only show $4,700. Is that correct? So there will be a mismatch between the $4,700 deduction (and W2) and the $5,000 reimbursement.

I read something online while researching that I needed to add this $300 to each employee's income so that it is taxed - because they are getting reimbursed from the FSA administrator the extra $300. But I certainly don't want to PAY them the extra $300 through payroll.

ACK, I'm confused.




VIP Member
May 12, 2011
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United States
Look up "Proposed Treasury Regulation 1.125-5 (o) and that tells you what you can do.

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