Thanks for the reply!
This is for my youngest child (of three), so we've been contributing and using the dependent care FSA for many years at this point. In the first year that we opted into the FSA (2011), we contributed $416.67 * 4 = $1,667 to the FSA, but had $18,306 in daycare expenses, so we used all of the funds in that first year, since we had already racked up well more than what we contributed when we first opted in to the FSA.
In every subsequent year, this has never been an issue because we usually spend well over $5,000 after only 6 months of childcare (even earlier back when we had two children in day care at the same time). Since our youngest child began kindergarten this year, we no longer pay for childcare at all. Due to COVID-19, we ended up stopping childcare a few months earlier than we initially anticipated in 2020, which is what has caused this issue where we spent slightly less within the calendar year than was technically withheld, even though we still exceeded $5,000 for the employer plan year.
Here is the history of what was reported in box 10 of my W2, and what was actually paid in childcare for each tax year since I elected into the dependent care FSA (as reported on form 2441 for each previous year we filed):
2020: $3,333 / $2,835
2019: $5,000 / $11,385
2018: $5,000 / $11,089
2017: $5,000 / $10,669
2016: $5,000 / $16,142
2015: $5,000 / $20,610
2014: $5,000 / $17,280
2013: $5,000 / $18,097
2012: $5,000 / $16,435
2011: $1,667 / $18,306
At the end of the day, the tax difference is not significant if that additional $498.33 is considered taxable income (ends up being about $100 in tax), but I still wanted to make sure I wasn't missing anything since we did use all $5,000 of the FSA funds per my employer plan year rules. It just seems strange that it might end up being taxable solely on account of the fact that my employer plan year crossed calendar years, and the dependent care expenses, when measured solely on a calendar year basis, did not exceed what was withheld on a calendar year basis.
