First world problems - FSA

[NumberWhizMD]

This year we decided to switch from my husband's FSA for dependent care expenses to mine. No real reason, but decided to do it.

I get an email from work this week that due to an audit, not enough individuals were enrolled past a certain threshold, so my maximum FSA I can claim is less than 1/3 the total amount. They are "refunding" the overdrawn funds as taxable income.

I realize that getting upset over a minimal tax increase is not that big of a deal, but we would've never switched in the first place if we knew this were going to happen! I want to save every tax dollar I can (and I'm paying MORE than enough in daycare expenses yearly without any real tax breaks anyways).

I know this forum would understand.

Ok...rant over.

[tylerjw12]

Yeah, these accounts get caught up in discrimination testing. Basically tax advantaged benefits can't favor high earners & owners in an unbalanced way vs other employees. Not uncommon for DCFSAs to fail the test. Nothing you could have done to know or plan for this.
If your employer failed this year, it's reasonable to think they'd fail again in the future.

[NumberWhizMD]

Yeah, these accounts get caught up in discrimination testing. Basically tax advantaged benefits can't favor high earners & owners in an unbalanced way vs other employees. Not uncommon for DCFSAs to fail the test. Nothing you could have done to know or plan for this.
If your employer failed this year, it's reasonable to think they'd fail again in the future.

Yeah. I guess I didn't realize this was a possibility. We'll probably switch back to my husband's for next year, as he didn't have any issues (and doesn't work in healthcare). Hopeful it doesn't happen again. Really, not a huge issue, more of an annoyance than anything!