Dependent Care FSA - Reimbursement in next tax year

[SolidFire501]

My employer offers a dependent care FSA that ran from September 2019 through August 2020.  I elected $5,000, which was withheld from my paycheck in the amount of $416.67 per month.

I paid $3,780 in daycare expenses from September 2019 through December 2019, and another $2,835 in daycare expenses from January 2020 through August 2020.  My child has since stopped attending day care altogether.  So, according to my employer, I had expenses in excess of $5,000 for the plan year, and was reimbursed the full $5,000.  I submitted for reimbursement in February 2020, using my day care expenses from September 2019 through February 2020 which was in excess of $5,000.  At the end of 2019, I had $1,666.68 in my FSA.  Since my reimbursement request exceeded the funds in my FSA t the time that I submitted for the reimbursement, they reimbursed the full amount in the account immediately, and then continued to reimburse the additional $416.67 per month for the remainder of the plan year until I had been reimbursed the full $5,000.

According to my employer's plan year, I did in fact use all $5,000 of my dependent care FSA money within the plan year, and was reimbursed in full.  However, in tax year 2020, I technically funded $416.67 * 8 = $3,333.33 towards my FSA (this was reported on my 2020 W2), but only had $2,835 in day care expenses that were actually accrued in 2020.

How do I handle this?  Does the $3,333.33 - $2,835 = $498.33 become taxable income in 2020, since I did not technically have $3,333.33 in dependent care expenses in 2020?  Or is the full amount still non-taxable since I did have eligible expenses in excess of this amount according to my employer plan year?  Am I am able to claim that some of my 2019 care expenses were paid in 2020, since that is when they were reimbursed from my FSA, even though I personally paid them in 2019 and just waited until 2020 to get reimbursed?  I am not sure of the distinction between "paid" and "reimbursed" in this context.  I paid for 2019 care in 2019, but was reimbursed for some of it in 2020, because I waited to submit for reimbursement until I had accumulated at least $5,000 in total expenses so I could avoid having to submit a follow up claim for reimbursement.

Thanks in advance!

[SamS1]

What was reported in box 4 of your 2019 W-2 and what did you report for child care expenses in 2019? 

In 2019, on your F2441 for child and dependent care, you would have reported $3000 in child care expenses (maximum for 1 child).  If your 2019 W-2 reported $1667 in box 4 (416.67x4 months), you should have received a tax credit of for minimum 20% of the difference ($3000-$1667=$1333) or $267. 

According to your scenario, you were reimbursed 100% for your expenses so in theory you were not entitled to that $267 tax credit in 2019. Therefore, due to the timing of your plan, yes you would need to include the $498 in 2020 income but you any additional tax you have incurred in 2020 has already been offset by the additional tax credit received in 2019.

[SolidFire501]

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.

[MaryM428]

Many taxpayers experienced this in 2020 due to COVID eliminating many child care providers.  The government has not offered any relief for taxpayers in your situation and the amount withheld that was not used for childcare is now taxable.