Health Care Spending Accounts - A different Kind of Problem

This is generally called a 125 cafeteria plan. You're right that you don't have to repay the amount of an overdrawn account on termination. The problem becomes when did you terminate. If the company can't tell you why it was $508.50, call the plan administrator (the people you sent the bills to for payment) and ask them the balance at year end. It's possible you were paying an administration fee while you weren't earning any salary.

To zero out the flexible plan, transfer the balance to wages. That's what the company did. Any slight diferences, transfer to miscelleneous expense or income.

If you're wondering if it was really taxable income, ask at "misc.taxes" or "misc.taxes.modified"

It's misc.taxes.moderated

I checked the IRS pubs last night. There is a flow chart that explains when it is and is not taxable. In this case, my understanding is that you did not contribute to the plan (I know you think you did - more on that later) so all excess reimbursement is taxable. But you should check with the pros in misc.taxes.moderated.

As for your "contribution". The way it is explained is that you AGREE to a lower salary IN RETURN for this medical reimbursement plan. That is the reason you were not taxed on the money used to fund it. If you had contributed to the plan, as we all think we do, that would have to show up as wages.

-- Vic Roberts Replace xxx with vdr in e-mail address.

First lets take care of your 2 accounts. Lets say you planned to set aside $100/mo for $1200. So you began the year with a transfer between the two accounts for $1200.

Then after 10 months the job is terminated. We need to change that transfer to $1000. Either change the original transfer or make another transfer (for $200) to accomplish the reduction. This isn't corporate accounting, these records are for our own benefit - do whichever is easiest for you.

Having done this it turns out that in the claims account more has been paid out than our $1000. To match your circumstances, lets say the original planned amount, 1200, has been paid out. So we need to make an entry in the claims account to bring the claims account to zero for the plan year. Use an expense category, give it a name consistent with related categories and something like "write-off". So in our example, we make an entry in the claims account, expense category "write-off", $200.

Consider the common case where someone sets aside $1200 for the year and submits only $1000 in claims. At the end of the plan year that remaining $200 is just gone and an entry is made to write it off. Well you are doing the same thing only where one write off is a credit, yours is a debit (or vice versa).

Now your Quicken entries are complete, both accounts total zero, the entries are understandable - there is only the transfer between the two accounts and a write-off in the claims account.

None of this has anything to do with income.

Left that sentence by itself - didn't want it to be overlooked. Call the payroll department that issued the W-2 and ask them for the detail - what numbers did they add up to get that total.

It was several years ago that I made my posts about FSAs, my references were several of those annual "Your 200x Income Taxes" books. Don't recall whose or which years, sorry, so can't provide a reference. If that payroll department tells you that FSA claims were included as income then call you fsa plan administrator and ask for a reference. (the company can be wrong, I can be wrong, with a pro-business federal government the rules can have changed, ...). You can also call the IRS. The IRS operates their call center on a 1st level, 2nd level, ... system. If the 1st level doesn't seem competent, keep pressing to talk to someone more familiar with the details.

And please keep us informed here, especially so if we need to make changes in what is posted re fsa's.

Good luck dick w

I posted a message earlier today in which I said that the excess reimbursements were taxable - but I now believe I was wrong and agree with you.

Here is what is stated on page 13 of IRS Publication 969. "You must be able to receive the maximum amount of reimbursement (the amount you have elected to contribute for the year) at any time during the coverage period, regardless of the amount you have actually contributed. The maximum amount you can receive tax free is the total amount you have elected to contribute to the health FSA for the year."

-- Vic Roberts Replace xxx with vdr in e-mail address.

Thanks for your help, everyone. As it turns out, that $540 was not counted as income. The discrepancy came from other pre-tax reductions not listed on my W2 (because they're not really tax related) and thus not appearing in my Quicken reports. Once I accounted for those, everything balances.

Regards,

Margaret

Glad you got it worked out. Hope everything else works out as well.

Thanks for the reference! Very uncomfortable to be posting tax detail from just an old memory.

dick w

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