If $800 from 2017 dependent care FSA funds is left over and used in the 2018 grace period, does that reduce the allowed 2018 FSA contributions to $4200 vs the full $5000?

[pphilly]

i.e do unused dependent care FSA funds from one year that are used in the plan's 2.5 month grace period early in the following year count against the following year's $5,000 IRS allowable max dependent care FSA contribution?

[JohnW15 · Accepted solution]

No -- the $800 of FSA funds that weren't used in 2017, but were used during the 2018 grace period, will actually be added to any 2018 FSA contributions you made. 

Please see the instructions for lines 13 through 15 in Instructions for Form 2441 for more information.  I also include Form 2441 here so that you can compare the instructions to the actual form to better visualize what's going on.

[pphilly]

The instructions for form 2441 don't actually answer the question as to what's actually going on from the IRS perspective, which is why I posted it. So the IRS counts / adds funds used in the grace period against the $5000 max allowable for 2018 then, rather than the prior year 2017 when the funds were contributed? i.e If you contribute $5000 for 2018 on top of say $800 from 2017 used in the 2018 grace period, then the IRS counts that as if you contributed over the max $5000 and the additional amount (i.e. $800) would be taxed?

[pphilly]

In that scenario, those grace period funds were for the 2017 plan year and used up according to the rules of the plan, so its not clear why the IRS would add them to the following year 2018 fsa contribution total instead.

[JohnW15]

In your scenario, the $800 would've been deducted on line 14 of the 2017 Form 2441, reducing the 2017 line 15 amount to $4,200, and the taxable benefits on page 2 of the 2017 form would be based on $4,200 rather than $5,000.  Then, in 2018, the $800 would be carried over to Form 2441 line 13, which would increase the 2018 line 15 amount to $5,800, and the taxable benefits on page 2 of the 2018 form would be based on $5,800 instead of $5,000.

[pphilly]

Thanks, do you mean it would have been $4200 in "excluded" benefits for 2017 (line 25) rather than taxable? That's where the difference went to last year. Line 26 was $0. Then for 2018, the grace period ammt ($800) ends up as taxable benefits (line 26) and excluded benefits (line 25) stays at $5000. So, basically, the IRS penalizes you for using funds in the grace period by taking the tax deduction for 2017  back from you in 2018 for all grace period funds you use if you also add the max $5000 to the account for 2018 - if i'm doing it right?

[JohnW15]

I get what you're saying.  There are a couple of "enter the smaller of" lines that could presumably throw a wrench into the computation, but I think in the majority of situations you're right.  

[tempask]

Hi Phily,

did you find a conclusion to your issue. Did IRS indeed tax you on the amount in the grace period. Asking since I am filing taxes today and urgently need an answer. 

Would appreciate your help;