W2 box 10 dependent care benefits not 2441

[s_rolyat]

expense were for braces under special FSA-but shows up in box 10 dependent care expenses, now turbotax wants it under 2441 which seems wrong what should I do? if I did spend the funds on braces but unless I show it expended (like fill out 2441) I pay tax on it defeating the purpose of the FSA in the first place.

Thanks

[VictoriaD75]

There are different types of flexible spending accounts: dependent care flexible spending accounts or health care flexible spending accounts.

Dependent care spending accounts allow employees to set aside up to $5,000 each year to cover the costs of caring for a dependent child or aging parent. These contributions are reported in box 10 of your W-2 and then offset with the childcare expenses on Form 2441.

Healthcare spending accounts allow employees to set aside up to $2,700 from their 2019 salary to cover medical expenses they anticipate incurring during the year. These amounts are not required to be included on your W-2.

If you had a medical FSA, you may have a reporting error on your W-2. Contact your employer to get this corrected.

[Evolutions400]

I am the accountant and an employee advised their W-2 had the same error. To correct, our payroll processor said it would take 8 weeks to revise. Could I tell the employees to file by ignoring box 10 while the W-2 is being amended.

When I called our payroll processor, they said when the W-2 is going to be amended, there should be nothing in box 10, but an amount under box 12 and the wages would go up by the same amount. I didn't think this was correct because health FSA is pre-tax.  I called the IRS and they seemed to be not knowing eventhough they are the department that created these rules.

Thanks for all your help.

[BillM223]

First, the IRS says in Pub 969 that 

"Unlike HSAs or Archer MSAs, which must be reported on Form 1040, 1040-SR, or 1040-NR, there are no reporting requirements for FSAs on your income tax return." Of course, this is referring only to medical FSAs.

So there shouldn't be any reference to contributions or expenditures to/from the FSA in box 12. 

In the W-2 Instructions, the IRS says,

"You may also use this box [box 14] for any other information that you want to give to your employee."

That is, the employer may make an entry in box 14 to note the amount of the FSA contribution, but since most codes in box 14 are not fixed but can be made up by the employer, except for the predefined codes, they have no impact on the tax return.

"but an amount under box 12 and the wages would go up by the same amount. I didn't think this was correct because health FSA is pre-tax. "

You are correct, your payroll processor is not. As noted above, no part of the medical FSA activity should go in box 12, and an entry in box 14 is optional. And, yes, the contributions to the FSA are pretax so they should NOT be in Wages in box 1 on the W-2.

"Could I tell the employees to file by ignoring box 10 while the W-2 is being amended."

Filing with a W-2 that materially differs from the copy that the IRS has creates the possibility that an IRS software program will spit out a letter to the taxpayer. What are the odds? I can't say, especially in this turbulent year.

For employees who owe money or expect only a small refund that they don't particularly need yet, it might well be simpler to wait for the corrected W-2s (especially if they have to be corrected more than once - note the box 12 comment). As you probably now know, it appears that the 1040 filing date is being moved to July 15th - but watch the IRS website for official updates.

If the employee is desperate for the refund, I would just advise the employee that filing without the amount in box 10 may create IRS correspondence down the road, even though the employee is trying to do the right thing.