In May 2005, changes were made to the rules prohibiting deferred compensation under a cafeteria plan. Employers are permitted 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 may be used to pay or reimburse expenses incurred during the grace period. See Prohibition of deferred compensation for Cafeteria Plans

This arrangement also applies to contributions for dependent care assistance. Existing guidance 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 cafeteria plan, the amount electively contributed by an employee for the year for dependent care assistance (plus any employer matching contributions attributable thereto) is considered a reasonable estimate.

Where an employer amends a cafeteria plan to provide a grace period for dependent care assistance, the existing guidance may continue to for followed, 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).

Example

An employer amends a 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 the $5,000 salary reduction amount elected by the employee for dependent care assistance in 2006.

...back to 8 September 2005

Further information:
Section 129 - Reporting Requirements for Dependent Care Assistance Programs

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