IRS Clarifies End-of-Year Cafeteria Plan Tax Reporting

September 7, 2005 ( - The Internal Revenue Service (IRS) on Wednesday issued guidance on how plan sponsors who have amended a cafeteria plan to add a grace period for qualified dependent care assistance should handle the related tax reporting.

The  IRS document said that employers are permitted to change their cafeteria plan to allow for a grace period at the end of their plan year during which unused benefits or contributions for dependent care can be applied to qualified expenses incurred during the grace period.

According to the IRS, 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.

If the plan sponsor is unsure of 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 § 125 cafeteria plan, the amount electively contributed by an employee for the year for dependent care assistance (plus any employer matching contributions attributable thereto) will be considered a reasonable estimate, the tax officials said.

An employer that amends its cafeteria plan to provide a grace period for dependent care assistance may continue to rely on Notice 89-111, 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).