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Dependent Care FSA High Income Earner Reduction

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  • Dependent Care FSA High Income Earner Reduction

    I got a letter late Dec 2015 from my employer informing me that, even though I've contributed $5000 to Dependent Care Flexible Spending Account for 2015, they have not determined that I am a high ncome earner and I am only allowed to contribute $1500 for 2015. The rest of $3500 will be considered regular income (but I still have to file a dependent care FSA to get them), but they will be reported as regular income.

     

    I asked for some IRS links and they sent me a link to https://www.irs.gov/pub/irs-pdf/p15b.pdf which was issued Dec 23 but it is for 2016, not 2015. I asked for a similar link for 2015 and I did not get it yet, but was told that such rules are in place since the 80s.

     

    Assuming such rules are indeed valid for 2015, how can I fight back the late notification? If I knew this earlier, my spouse could have contributed the total $5000. Not doing so costed me more than $1000.

     

    Any ideas on how I can fight such a late notification are appreciated.

  • #2
    Sorry, this is just how it works per IRS rules.

    It's highly dependent on the group/company as if you're in the top 20% of earners then it just phases out.

    The company doesn't know this ahead of time as the participant pool changes all the time during the year people leaving and people entering. What happens is the company does a "test" near the end of year to see who falls where and makes the determination who get's phased out.

    My wife had the same issue happen to her and unfortunately can't do anything about it. They just redo your W2 so you get tax on that amount.

    For this year we switched to me to do the dependent care FSA. Again the rule is dependent on your particular company so if you have a lot of high wage earners only then you're going to be near the median. But if your company is a mix of salary levels lets saw high earners and low earners then you do run the risk you're probably going to be in the top 20% and get the benefit phased out ...

    If you can only do the credit your other strategy is to convince even HIGHER salary people to participate so you're closer to the avg -- so get the dept head, the CEO, all VPs, etc... Then you're set!!!

    Went through the same exercise too... So feel your pain!

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    • #3
      So, I am reading https://www.irs.gov/pub/irs-pdf/p15b.pdf and it says that a highly compensated employee is one that either owns 5% of the business (not applicable) or 2. one that is paid 120k or more. "You can choose to ignore test (2) if the employee wasn't also in the top 20% of employees when ranked by pay for the preceding year."  The key word here being "preceding". Because of "preceding", the way I interpret this is that, if I am in the top 20% for 2015, I am considered a highly compensated employee for 2016 and my DPFSA gets reduced. So my employer knows that at the very beginning of 2016 and can inform me by, say, Feb 2016 of this, and thus I can plan accordingly.We cans shift this back by a year and I get my situation. Informing me of this in the last 10 days of the year seems too late.

      Unless of course, the employee chooses not to ignore 2, which the employer can, but seems wrong.

      Am I missing something ?

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      • #4
        Need to ask what test your employer uses. Also if you just started you wouldn't have a "prior" year to refer to.

        But at the end of the day then course of treatment isn't going to change. It's not like your employer is going to break the law and exclude those wages and not likely they "gross up" to make up the difference esrpcially since you're considered "highly compensated".

        But I totally feel for you. Sometimes HR just blows and you want to believe they are looking out for the employer but in reality they are looking out for the company.

        Yeah we felt shafted too when it happened to my wife. So when enrollments came around last Nov I specifically asked about this for my employer as I didn't want a repeat and I claimed that benefit with my wages instead.

        HR groups vary widely with companies, in general seems for med groups they don't focus on that part of the biz too much .

        For others reading, you do want to ask about this when enrollments come back around. If you're dual income family you may want the "less componesated" person or making less then 120k take the benefit. Some HR don't even know what you're talking about so you can refer to the IRS publication.

        Net, think this is just one of those "teaching moments".

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        • #5
          I do have a prior year.

           

          So at the moment, I think the only thing I can say is that they have informed me too late...about 10 months too late. And it would be difficult to fight that, right ?

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          • #6
            Guess you could try, but wouldn't hold my breath.

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            • #7
              Thank you PenguinMD. I am trying, but the last email I got starts with "this will be my last email to you" (I've been professional, but persistent). Too bad there is no legal requirement to inform employees in a timely manner on any change in benefits.

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              • #8
                Argh, hate I can't edit a previous post. Hit reply too early.

                Anyways, keep things in perspective if it's $2500 you won't now get exempted and let's say marginal tax rate is 30% you're really taking about $750 of savings.

                Weigh your level of effort/frustration to what else you could be doing . If it's a matter of principal then see if it's worth it. Dealing with HR is sometimes just talking to a wall ...

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