Should I forfeit unused 2015 FSA money for dependent care expenses? Will the amount I'd be taxed and penalized be too large?

[sandra-larsen]

The amount I put in FSA was $1,000. I live in Minnesota.

[Opus 17]

There is no penalty for forfeiting, you just lose the money.  Why do you need to forfeit?  Do you not have qualifying expenses?

[sandra-larsen]

Sorry, I phrased my question incorrectly. I have unused funds because circumstances changed and I didn't have any child care expenses in 2015. I would like to get the money back, but I know that it will be taxed and I'm sure there's a penalty. I'm wondering if after taxes and penalties how much of the $1,000 I put into the account will be left; and if it's worth it or if I should just cut my losses.

[Opus 17]

There is no penalty for improperly spending the money, just income tax.  (It's one place the IRS did not place a penalty.)

The problem is that the trustee is not supposed to release the money without proof of a qualifying expense.  

One situation would be that a parent sets aside money in an FSA to pay for care, and does pay for care and get reimbursed, but then can't qualify for the expense because of marital separation and custody issues.  The expense was qualified at the time, so the plan trustee paid it, but it ends up not being qualified when the tax return is filed, so there is income tax owed (but no penalty.)

Your problem is I don't think there is a legal way for you to get the money out of the account without lying to the plan trustee and submitting a fake bill for service.  FSAs are "use it or lose it" by the way the law is written.

[sandra-larsen]

Thanks. I thought this might be the case. It was a transition year for us. My daughter could no longer attend her normal summer daycare/camp because she was too old (12), but I thought I'd still have some expenses with other day camps I was planning to sign her up for. It turned out that she was busy with other activities and didn't require paid care. Since FSAs are "use or lose" then it's unfortunately a loss this year ...

FSAs are good if you have small children that go to daycare, but I would caution anyone with an older child (11-12 yo) in setting up a FSA unless they have definite child care plans. Don't have an FSA if you are unsure. My lesson learned!

[sandra-larsen]

Is there anything that I can do on my 2015 taxes for the forfeited $1,000?

[Opus 17]

It will be reported on your W-2 and turbotax will pick up on that and ask if it was spent on qualified expenses, unqualified expenses, or forfeited, and you say forfeited.  You won't be taxed on it but there isn't any way to get part of it back.