Form 2241 - contributed more than 5k but plan was not amended

[skydelta1]

Here's my situation:

1. My Dependent Care FSA plan starts on July 1st and is capped at $5000. We have two kids and spent 33k on daycare in 2021 divided roughly equally (yikes, I know).

2. In tax year 2020 due to some payroll issues only $3360 were deducted (I elected the full $5000). The difference from $5000 was deducted between 1/2021 and 6/2021.

3. As a result, in tax year 2021 $6425 were deducted.

4. To my knowledge the employer did not amend the plan in 2021 and does not allow carryover. The maximal election never changed from $5000. My benefits manager (Mercer) has no idea what I am asking about.

It looks like TurboTax is entering "$10,500" on Line 21 of Form 2241. However, the same line says "don’t enter more than the maximum amount allowed under your dependent care plan". What should I do in this case?

I calculated it manually and it looks like if I did enter "$5,000" on Line 21 my refund would actually be higher. Obviously I would like to do what's right.

Thanks!

[BillM223]

"In tax year 2020 due to some payroll issues only $3360 were deducted (I elected the full $5000)." - So did you claim this amount on your 2020 return?

In which years did you spend this $33k? Spread evenly over 2020 and 2021?

"As a result, in tax year 2021 $6425 were deducted." Deducted where? in box 10 on your W-2?

"My benefits manager (Mercer) has no idea what I am asking about." - Your employer was under no requirement to modify their plan based on tax law changes in the last two years, but it is inexplicable that an HR professional would have no idea of what you were talking about.

[skydelta1]

@BillM223 

Thanks for the response! Sorry for not being clear enough.

In tax year 2020 I specified $3360 as the excluded amount on Form 2241, as this is what I contributed. I did claim an additional credit for dependent care expenses of 20% of the difference ($2640).

I spent 12k in 2020 (8k / 4k per child)  and 33k in 2021 (~16k per child). Box 10 in 2021 W-2 shows $6425. Box 10 in 2020 W-2 shows $3360 (the sum is nearly $5000 x 2).

I agree regarding Mercer. The problem is that customer service is useless and everything requires internal service requests, which are often misunderstood and take multiple back-and-forth.

[BillM223]

A few questions:

1. "In tax year 2020 I specified $3360 as the excluded amount on Form 2241, as this is what I contributed. I did claim an additional credit for dependent care expenses of 20% of the difference ($2640)." But you said that the employer plan maximum was $5,000, so the difference would be 1,640, right? What am I missing?

2. "Box 10 in 2021 W-2 shows $6425. " Again, I thought you said, "The maximal election never changed from $5000" so how could they put 6,425 in box 10? Unless your plan allows for this.

[BillM223]

A few questions:

1. "In tax year 2020 I specified $3360 as the excluded amount on Form 2241, as this is what I contributed. I did claim an additional credit for dependent care expenses of 20% of the difference ($2640)." But you said that the employer plan maximum was $5,000, so the difference would be 1,640, right? What am I missing?

2. "Box 10 in 2021 W-2 shows $6425. " Again, I thought you said, "The maximal election never changed from $5000" so how could they put 6,425 in box 10? Unless your plan allows for this.

[skydelta1]

@BillM223 thanks again

1. The plan runs from July to July, not from January. Due to payroll issues I did not contribute for a few months in 2020 (although I elected to contribute). By the time they fixed it 2021 already started (of course they had to mess this up too, which is why my total contribution for the plan year of 7/2020-6/2021 is $5000 - $215).

Regarding the $2640 vs. $1640, I meant the difference from $6000, which was the maximum of allowed expenses for two children in 2020 (Form 2241 Line 3 / Line 29). I claimed 20% of the $2640.

2. How could they put $6425 in Box 10? Well, I don't know if the plan allows for it, but that is the exact amount I contributed in tax year 2021.

Let's ask this differently, if the plan only allows to contribute $5000 but they let me contribute more than than that (and less than $10,500), whose problem is it?

[BillM223]

"Let's ask this differently, if the plan only allows to contribute $5000 but they let me contribute more than than that (and less than $10,500), whose problem is it?"

Honestly, I don't know. This had not been an issue until the limit was changed to $10,500 - before that, everyone "knew" it was $5,000 max.

My sense is to let it ride, because the IRS is unlikely to examine every employer's plan to see what they did.

However, I am still puzzled about your statement that when you changed the $10,500 on line 21 to $5,000, that it helped your refund. 

Does your return show that you got a Dependent Care credit in 2021?

[skydelta1]

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@BillM223 

> However, I am still puzzled about your statement that when you changed the $10,500 on line 21 to $5,000, that it helped your refund. 

Looks like an issue with the worksheet. If I did not miscalculate anything, line 3 is $11,000 instead of $9,575 (because line 21 is $5000 and line 22 is $6425, so line 24 / "excluded benefits" is $5000 instead of $6425). This increases the final amount in line 9a / 11 by about $700 for me.

Obviously I am not going to claim this additional amount. Also, there is probably a higher chance of getting audited for that than just specifying $10,500 as the limit. And as you mentioned, am I supposed to prove the employer increased the limit if I get audited?

> Does your return show that you got a Dependent Care credit in 2021?

Yes, I am getting a credit for the expenses.

[BillM223]

Line 22 says "Is any amount on line 12 or 13 from your sole proprietorship or partnership?" Did you mean line 23?

"This increases the final amount in line 9a / 11 by about $700 for me." What I think is happening is that the $5,000 is causing more of your actual spending to be shifted away from being matched to FSA spending to being shifted to spending that increases your Dependent Care credit.

This is a classic case of Unintended Consequences. Congress upped the amount that you could contribute to your FSA (which sounded good), but then sharply increased the amount of credit you could get. A number of taxpayers have found that the credit brings them MORE benefit than the salary exclusion that the FSA contributions represent. This was usually not the case before (although it was sometimes, which is why taxpayers were advised at the start of the year to run a test return with the exclusion and with the credit to see which way was better).

Since, on the surface, it appears that the number that should be used is $5,000, I think you should go ahead and file that, even though it's to your benefit.

The instructions for line 21 state (as I am sure you have read): "Your employer can tell you whether your dependent care plan was amended to increase the amount that can be excluded." If your employer told you that they did NOT amend their plan, then "For 2021, the ARP permits employers to increase to $10,500 (previously $5,000) the maximum amount that can be excluded from an employee's income through a dependent care assistance program." So the limit must still be $5,000, so far as you know. It would be even better if you had something in writing from your employer that they did not amend the plan. Stick that in your tax file.

And since the instructions for line 21 clearly state: "Don't enter more than the maximum amount allowed under your dependent care plan.", you have done just that.

It's not your fault that you are benefiting from an unintended consequence of the American Rescue Plan, that the less expense you allocate to the FSA offset means more expense for the credit which happens to be better for you anyway.

Save all this documentation in your tax file, in case anyone comes to ask. The really important thing in an audit is not to be seen as committing fraud, but here you have ample documentation that you are following the literal instructions of the FSA rules and the 2441, as confused as the situation has turned out o be.

[bobcobb]

Did you figure out how to change the amount TurboTax is entering in line 21 on Form 2441?

My spouse changed jobs mid-year and over-contributed by around $500. Neither plan raised its limit above the $5,000, but TurboTax is entering $10,500 in line 21, and I can't see how to fix it.

Otherwise, I will just have to report the excess contribution as income and then file an amendment later for the dependent care credit amount.

Thanks.

[BillM223]

"Neither plan raised its limit above the $5,000, but TurboTax is entering $10,500 in line 21, and I can't see how to fix it."

There does not appear to be a way in TurboTax to adjust line 21, other than to override the line in Forms mode in the desktop software.

[bobcobb]

Thanks. I wonder if it’s defaulting to $10,500 for everyone, or only gets triggered if sees contributions over $5,000. If the former, could probably just let it ride and see what happens, but will just report the difference as other income and then decide if want to file an amended return for the difference in the credit.

Seems like a miss on TT part to not have a step/question on what the employee limit was for 2021.

[BillM223]

"Seems like a miss on TT part to not have a step/question on what the employee limit was for 2021." - yes.

And of course, it will go back to 5,000 for tax year 2022, but still needs to be addressed, because not all taxpayers were subject to the 5,000.