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The flexible spending account is a tax-advantaged account used to pay for health care or dependent care. An employee contributes pre-tax money to a flexible spending account to pay eligible out-of-pocket expenses. The Internal Revenue Service requires employers to complete a Form W-2, Wage and Tax Statement, for employees annually and provides rules for reporting requirements. Employers report certain FSA contributions on the W-2 form. However, the reporting requirements are not the same for health care and dependent care FSAs.
The IRS regulates flexible spending accounts. Employees make pre-tax contributions to the accounts through payroll deduction, which reduces the employee’s taxable income. The IRS establishes the maximum limits for FSA contributions, which were set for 2013 at $2,500 for the health care FSA and $5,000 for the health care FSA. The FSA funds are not subject to taxes when used to pay eligible expenses. Funds in your FSA that are not used during the benefit year do not roll over. The employee loses the unused funds.
Employers provide copies of Form W-2 to employees and to local and federal government agencies, such as the IRS and Social Security Administration. The form is used to report income earned or received by the employee and the local, state and federal income taxes withheld from the employee’s pay. Also included on the form are the payroll taxes withheld for Social Security and Medicare. The employee uses Form W-2 to file annual income tax returns.
If your health care FSA is offered as part of a group health plan and funded exclusively through salary reduction or your pre-tax contributions, it is not reported on your W-2 form. The rules differ for health care FSAs offered under cafeteria plans, as regulated by Section 125 of the tax code. In that case, the IRS requires employers to include on the W-2 form the value of the health care FSA for the plan year that exceeds your salary reductions for all qualified benefits included in the cafeteria plan.
Employers report dependent care benefits in box 10 of your W-2 form. Dependent care benefits include your pre-tax contributions to your dependent care FSA. Also included are eligible amounts paid by your employer to you or to your day care provider and the fair market value of dependent care in a facility provided by or sponsored by your employer. The fair market value of dependent care services that exceed the non-taxable limit of $5,000 allowed for the FSA is listed in boxes 1, 3 and 5 of the W-2 form. The IRS provides the example of an employee who contributes $4,500 to her FSA and uses an employer-provided day care for services valued at $700. The amount of $200, which is taxable, is over the $5,000 limit and is reported in boxes 1, 3 and 5.
- Aetna: Health Care FSA
- Aetna: Dependent Care FSA
- Internal Revenue Service: General Instructions for Forms W-2 and W-3
- Internal Revenue Service: Form W-2 Informational Reporting of the Cost of Employer-Sponsored Group Health Plan Coverage
- Internal Revenue Service: Notice 2012-9 Interim Guidance on Informational Reporting to Employees of the Cost of Their Group Health Insurance Coverage
- Internal Revenue Service: Publication 503 – Child and Dependent Care Expenses
- Internal Revenue Service: Publication 15-B (2012), Employer's Tax Guide to Fringe Benefits, Main Content
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