Has anyone ever needed to adjust an employee's W2 based upon the eligible expenses under the Section 125 plan for dependent care? What are the IRS issues for this? THANKS!

Why would you need to adjust W-2 income for this? If the employee set aside a specific amount for dependent care under a properly constructed cafeteria plan, that amount is excluded from W-2 income. If the employee then fails to have enough expenses to use up that money, he or she will lose the money, so this situation would not require an amendment of the W-2. Was there some kind of error in reporting this initially?

We were instructed to issue a W2-C for those employees which returned a statement (showing proof of payment) and W10 from their daycare provider when the amount differs from the deduction. Are we not responsible for adjusting these? :confused:

I've been involved (human resources and payroll) with several 125 plans and have never seen any adjustment made to W-2s. There is a block on the W-2 that shows the dollars taken from the employee for the dependent care account.

In all the cases I've seen, the employer either pays the daycare provider directly, or reimburses the employee only for documented expenses. Thus, there is no adjustment necessary, because reimbursed expenses are always equal to documented expenses. The deduction from the employee's paycheck should not be adjusted, even if actual expenses are less than anticipated.

Thanks for the info!!!! I really appreciate this message board!

I have been researching this a bit further and found that our dependent care account is not set-up as a reimbursable account.

Our third party "125 administrator" sends the deducted pre-tax amounts directly to the employee (without the employee submitting a receipt or statement from the daycare provider) and it is the employees responsibility to submit this payment to the daycare provider.

With type of setup, wouldn't the pre-tax monies given to the employee which are not supported with a statement or daycare receipt from their provider be considered taxable income and need added to their W2 wages? Isn't the employer responsible for adjusting the gross wages? Have you heard of a dependent care 125 account estabilished in this manner?

Any assistance would be appreciated!

I'm no authority, but I've never heard of a third party administrator reimbursing for expenses without proper documentation. Your SPD should address how claims are filed/reimbursed.

If the third-party administrator is paying claims without adequate documentation, you run the risk of the entire arrangement being treated as a nonaccountable expense reimbursement arrangement. In that case, all of the amounts paid to employees, not just those that exceeded their actual expenses, would be includible on their Forms W-2.