Tax Tips

Dependent Care Assistance Reporting

IRS clarifies dependent care assistance reporting

    The IRS modified the application of the rule prohibiting deferred compensation under a cafeteria plan.  That guidance allows an employer to amend a cafeteria plan document to provide a grace period immediately following the end of each plan year during which unused benefits or contributions remaining at the end of the plan year, including contributions for dependent care assistance, may be used to pay or reimburse expenses incurred during the grace period.

Dependent care assistance

Previous IRS guidance also states that in a cash reimbursement arrangement, the amount reported on Form W-2, Wage and Tax Statement, is the total amount of cash reimbursement furnished to the employee during the calendar year. However, if the employer does not know the actual total amount of cash reimbursement at the time the Form W-2 is prepared, the employer may report a reasonable estimate of the total amount on Form W-2. For a salary reduction arrangement under a Code Sec. 125 cafeteria plan, the amount electively contributed by an employee for the year for dependent care assistance (plus any employer matching contributions attributable thereto) will be considered a reasonable estimate. An employer that amends its cafeteria plan to provide a grace period for dependent care assistance may continue to rely on the previous guidance, by reporting in Box 10 of Form W-2 the salary reduction amount elected by the employee for the year for dependent care assistance (plus any employer matching contributions attributable thereto).

Example: Suppose an employer amends its calendar year cafeteria plan to permit a grace period for dependent care assistance until March 15 of the subsequent year, that an employee elects salary reduction of $5,000 for dependent care assistance for the 2005 calendar year and elects an additional $5,000 salary reduction for dependent care assistance for the 2006 calendar year, and that the employee has $500 of dependent care contributions remaining unused at the end of the 2005 plan year, which is available to reimburse dependent care expenses incurred during the grace period. For the 2005 calendar year, the employer may report in Box 10 of Form W-2 the $5,000 salary reduction amount elected by the employee for dependent care assistance in 2005. Similarly, for the 2006 calendar year, the employer may report in Box 10 of Form W-2 the $5,000 salary reduction amount elected by the employee for dependent care assistance in 2006. (IRS Notice 2005-61, IRB 2005-39.)