IRS Clarifies W-2 Reporting Requirements for Dependent Care Grace Period

An earlier posting discussed the IRS change that now allows employers who sponsor Flexible Spending Arrangement (FSAs) to extend the deadline for reimbursement of health and dependent care expenses up to 2 ½ months after the end of the plan year.

Today the IRS in Notice 2005-61 has now clarified the Form W-2 reporting requirements when an employer has amended a cafeteria plan document to provide a grace period for qualified dependent care assistance immediately following the end of a cafeteria plan year. An employer that amends its cafeteria plan to provide a grace period for dependent care assistance may continue to report 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). Here is an example:

An employer amends its calendar year cafeteria plan to permit a grace period for dependent care assistance until March 15 of the subsequent year. 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. 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.

Here is the full text of the Notice.