Discrimination test for dependent care FSA?

[Anonymous]

Every year, DH puts $5k into his employer's dependent care FSA. Yesterday, he got an email from his HR dept. saying that they had done a discrimination audit of their FSA enrollments and that the "high earners" (those earning over $115k) were overly represented and cannot use the tax deferral. He will be getting a new W2 and we will have to pay taxes on that FSA money we had thought was deferred. I've never heard of this and his company said they hadn't had this happen before so they didn't warn any employees of the possibility. We usually get a refund, but I'm worried we will get killed on taxes now. Anyone have experience with this?

[Anonymous]

That's too bad, but it might not be as costly as you fear. You weren't saving $5000 in taxes, but instead were reducing your taxable income by $5000, so your tax savings were a few thousand dollars - the actual amount depends on your tax rate.

If you can't use the account, you will instead be eligible for the child care tax credit, which should save you $600 if you have one child and $1200 if you have two or more.

I don't know how the company works, but you might want to see if his compensation can be adjusted because of the loss of expected benefits.

[Anonymous]

FSA isn't a tax deferral, it's a way to pay for dependent care with "pre-tax" dollars. I've never heard of a company saying that an employee can't do this because of income limits.

How is this legal? Isn't it a federal program?

[Anonymous]

It is unfortunate but normal audit that should happen ever year. It happens if the % of lower income folks contributiing is significantly less than high income folks contributing. The plan is discriminating in favor of highly comped folks. The same thing can happen with 401ks, but 401ks have the option of a safe harbor so you don't hear about it as much.

Your husband will most likely be affected by this every year going forward. If you make less than 115k and have access to a dependent care FSA, you should contribute for the family.

[Anonymous]

Anonymous wrote:It is unfortunate but normal audit that should happen ever year. It happens if the % of lower income folks contributiing is significantly less than high income folks contributing. The plan is discriminating in favor of highly comped folks. The same thing can happen with 401ks, but 401ks have the option of a safe harbor so you don't hear about it as much.

Your husband will most likely be affected by this every year going forward. If you make less than 115k and have access to a dependent care FSA, you should contribute for the family.

Thanks for this. This is how they are now explaining it. I do have access to the FSA and make less than the 115k, so I'll set it up when my enrollment period comes around. I just wish they had been on top of this so he could have contributed more toward his retirement instead.

[Anonymous]

Anonymous wrote:It is unfortunate but normal audit that should happen ever year. It happens if the % of lower income folks contributiing is significantly less than high income folks contributing. The plan is discriminating in favor of highly comped folks. The same thing can happen with 401ks, but 401ks have the option of a safe harbor so you don't hear about it as much.

Your husband will most likely be affected by this every year going forward. If you make less than 115k and have access to a dependent care FSA, you should contribute for the family.

Happened to us in the 401k situation. Every year there is an audit and we get told how much can be put in.

[Anonymous]

Anonymous wrote:FSA isn't a tax deferral, it's a way to pay for dependent care with "pre-tax" dollars. I've never heard of a company saying that an employee can't do this because of income limits.

How is this legal? Isn't it a federal program?

Well, because as part of the law that created the program, it requires that the plan not be top heavy. This is not a secret. Nothing unlawful about it.

[Anonymous]

They should just let you deduct 20k for childcare not questions asked, 6k is laughable

[Anonymous]

Anonymous wrote:

Anonymous wrote:It is unfortunate but normal audit that should happen ever year. It happens if the % of lower income folks contributiing is significantly less than high income folks contributing. The plan is discriminating in favor of highly comped folks. The same thing can happen with 401ks, but 401ks have the option of a safe harbor so you don't hear about it as much.

Your husband will most likely be affected by this every year going forward. If you make less than 115k and have access to a dependent care FSA, you should contribute for the family.

Thanks for this. This is how they are now explaining it. I do have access to the FSA and make less than the 115k, so I'll set it up when my enrollment period comes around. I just wish they had been on top of this so he could have contributed more toward his retirement instead.

They may have just been impacted for the first time last year. Going forward those folks should be warned up front. At my company it took us 8 years before we started filling our dependent care testing.

[Anonymous]

Anonymous wrote:

Anonymous wrote:It is unfortunate but normal audit that should happen ever year. It happens if the % of lower income folks contributiing is significantly less than high income folks contributing. The plan is discriminating in favor of highly comped folks. The same thing can happen with 401ks, but 401ks have the option of a safe harbor so you don't hear about it as much.

Your husband will most likely be affected by this every year going forward. If you make less than 115k and have access to a dependent care FSA, you should contribute for the family.

Happened to us in the 401k situation. Every year there is an audit and we get told how much can be put in.

That really stinks. I think the law is ridiculous. There is no safety net for most of us. We are on our own for retirement and should be always allowed to contribute the max.

[Anonymous]

Anonymous wrote:

Anonymous wrote:

Anonymous wrote:It is unfortunate but normal audit that should happen ever year. It happens if the % of lower income folks contributiing is significantly less than high income folks contributing. The plan is discriminating in favor of highly comped folks. The same thing can happen with 401ks, but 401ks have the option of a safe harbor so you don't hear about it as much.

Your husband will most likely be affected by this every year going forward. If you make less than 115k and have access to a dependent care FSA, you should contribute for the family.

Happened to us in the 401k situation. Every year there is an audit and we get told how much can be put in.

That really stinks. I think the law is ridiculous. There is no safety net for most of us. We are on our own for retirement and should be always allowed to contribute the max.

The part that gets me about this is the uneven application; Company A has more lower income people using the program, so Mr 115K can get the tax break; Company B has fewer lower income people using the program so no tax break. It just seems so odd to restrict/limit a federal tax break based on the happenings at individual companies.

[Anonymous]

Anonymous wrote:

Anonymous wrote:

Anonymous wrote:

Anonymous wrote:It is unfortunate but normal audit that should happen ever year. It happens if the % of lower income folks contributiing is significantly less than high income folks contributing. The plan is discriminating in favor of highly comped folks. The same thing can happen with 401ks, but 401ks have the option of a safe harbor so you don't hear about it as much.

Your husband will most likely be affected by this every year going forward. If you make less than 115k and have access to a dependent care FSA, you should contribute for the family.

Happened to us in the 401k situation. Every year there is an audit and we get told how much can be put in.

That really stinks. I think the law is ridiculous. There is no safety net for most of us. We are on our own for retirement and should be always allowed to contribute the max.

The part that gets me about this is the uneven application; Company A has more lower income people using the program, so Mr 115K can get the tax break; Company B has fewer lower income people using the program so no tax break. It just seems so odd to restrict/limit a federal tax break based on the happenings at individual companies.

It's to incentivize Company B to encourage its lower level employees to take advantage of the benefit. They are "on their own for retirement," too.

[Anonymous]

Anonymous wrote:

Anonymous wrote:

Anonymous wrote:

Anonymous wrote:

Anonymous wrote:It is unfortunate but normal audit that should happen ever year. It happens if the % of lower income folks contributiing is significantly less than high income folks contributing. The plan is discriminating in favor of highly comped folks. The same thing can happen with 401ks, but 401ks have the option of a safe harbor so you don't hear about it as much.

Your husband will most likely be affected by this every year going forward. If you make less than 115k and have access to a dependent care FSA, you should contribute for the family.

Happened to us in the 401k situation. Every year there is an audit and we get told how much can be put in.

That really stinks. I think the law is ridiculous. There is no safety net for most of us. We are on our own for retirement and should be always allowed to contribute the max.

The part that gets me about this is the uneven application; Company A has more lower income people using the program, so Mr 115K can get the tax break; Company B has fewer lower income people using the program so no tax break. It just seems so odd to restrict/limit a federal tax break based on the happenings at individual companies.

It's to incentivize Company B to encourage its lower level employees to take advantage of the benefit. They are "on their own for retirement," too.

It's a short sighted approach because it doesn't uniformly address all workers. Truly helping lower income folks needs ti be addressed across the board when yiu do yoyr taxes. Not at an individual company level.

The salary threshold is also set across the US. It was meant to target Execs. Perhaps in Iowa an Executive makes 117k. But in high cost of living areas, a 32yo with kids makes 117k. The lower salaried folks you mention are very often the youngest workers without kids. There wouldn't be enough volume to join to balance the test to begin with.

[Anonymous]

Anonymous wrote:FSA isn't a tax deferral, it's a way to pay for dependent care with "pre-tax" dollars. I've never heard of a company saying that an employee can't do this because of income limits.

How is this legal? Isn't it a federal program?

It is a part of the law. High income earners cannot be overrepresented in the plan so that it skews only for one group.

[Anonymous]

Anonymous wrote:

Anonymous wrote:

Anonymous wrote:It is unfortunate but normal audit that should happen ever year. It happens if the % of lower income folks contributiing is significantly less than high income folks contributing. The plan is discriminating in favor of highly comped folks. The same thing can happen with 401ks, but 401ks have the option of a safe harbor so you don't hear about it as much.

Your husband will most likely be affected by this every year going forward. If you make less than 115k and have access to a dependent care FSA, you should contribute for the family.

Happened to us in the 401k situation. Every year there is an audit and we get told how much can be put in.

That really stinks. I think the law is ridiculous. There is no safety net for most of us. We are on our own for retirement and should be always allowed to contribute the max.

You do understands that nothing stops you from still saving the money. I will never understand that concept of "I can't save for retirement if it isn't tax deferred..."