Flexible Spending For Dependent Care Cap….

[Coronita]

I’m totally on a roll today in the weirdo things happening today…

Got this in the mail today.. New tax?

Funny I didn’t think $115k was really considered “high income”…..[img_assist|nid=18097|title=blah|desc=|link=node|align=left|width=400]

In English?

[equalizer]

I think this is the top-heavy test. I thought it only applied to retirement plans. IRS is attempting to crack down on execs offering benefits to all but in reality exec get 60% of the benefits.

http://www.irs.gov/Retirement-Plans/Fixing-Common-Plan-Mistakes—Top-Heavy-Errors-in-Defined-Contribution-Plans

Here is the $115K test:
http://www.nfpbenefitspartners.com/RJC_Planning_Group/hr/Nondiscrimation_Taxation/Dependent_Care.aspx

[UCGal]

I’ve hit that limit a few times when I’ve had big bonuses or a lot of stock options. It’s not new.

It sucks. But it’s not new. Just means you have to use post-tax money for dependant care.

[equalizer]

“55 Percent Average Benefits Test: The average DCAP benefits provided to the non-HCIs under all plans of the employer must be at least 55 percent of the average benefits provided to HCIs under all plans of the employer.”

So 55% of the DCAP benefits must go to people making under $115K.

[an]

This is yet another reason not to strive to make too much with W-2. For me, it seems like the best way to get the most after tax money is to work at a relaxing job with great benefits that pays well but stay below these magical cap $, then make the rest of your $ in 1099.

The competitive part of me wants to get that title and pay bump in my W-2 job. But the # crunching part of me periodically say that, it’s better to work hard doing 1099 or RE investment stuff than work hard to get that W-2 promotion. Learn to ride the gravy train. First, there’s the $150k income limit for applying passive loss in RE to active income (unless you’re a RE professional). Now, there’s this $115k income limit for DCA. I’m glad I don’t make enough to hit these caps. When all of my kids are in school and my wife go back to work full time, I’m definitely going to push her to try and get a 1099 job or open her own biz.

[Coronita]

The thing is though my w2 income didn’t really change *that* much this year from last from the previous year…. Why now? Or was I just randomly selected by my employer? Lol

[livinincali]

[quote=flu]The thing is though my w2 income didn’t really change *that* much this year from last from the previous year…. Why now? Or was I just randomly selected by my employer? Lol[/quote]

Obamacare made a slight change to the DCA. You can carry over $500 from a previous year if it was not used. Maybe your company is just doing a compliance check with Obabmcare related changes and happened to catch the fact that you had been over the limit.

[an]

[quote=flu]The thing is though my w2 income didn’t really change *that* much this year from last from the previous year…. Why now? Or was I just randomly selected by my employer? Lol[/quote]It didn’t change *that* much, but it did. Maybe you were on the edge before and now you’ve crossed over that edge.

[UCGal]

[quote=AN][quote=flu]The thing is though my w2 income didn’t really change *that* much this year from last from the previous year…. Why now? Or was I just randomly selected by my employer? Lol[/quote]It didn’t change *that* much, but it did. Maybe you were on the edge before and now you’ve crossed over that edge.[/quote]
In my case a big bonus pushed me over one year – and I got nabbed the next year. (Not the year of the bonus.)

They look backwards. The year I had the DCA cut in half, was a year I was under the limits… but it was based on the previous year.

As far as your plan to augment income with 1099 income… I get that. It takes some finesse to max out the w2 income to the sweet spot for max gain, least stress, etc. (It’s why I’ve consistently turned down managerial roles – it would push me out of my sweet spot.)

[no_such_reality]

[quote=AN][quote=flu]The thing is though my w2 income didn’t really change *that* much this year from last from the previous year…. Why now? Or was I just randomly selected by my employer? Lol[/quote]It didn’t change *that* much, but it did. Maybe you were on the edge before and now you’ve crossed over that edge.[/quote]

The rule applies to the top 20%. So last year you were top 20%. Prior years you weren’t.

[Cube]

Flu, it’s not just *your* income that matters. It is the proportion of contributions to the DCFSA coming from HCEs and non-HCEs at your employer.

If you had a bunch of non-HCEs that stopped contributing as much (or picked up a bunch of HCEs that started contributing more, or had a bunch of non-HCEs that were using the DCFSA get bumps in salary that pushed them into the HCE category), then you’d see this.

At my company, the people with kids are well-correlated to HCEs, so when HR prepares the plan info in December, they survey people to find out if we can pass the test. The last several years, they simply havn’t offered the DCFSA since we can’t get enough non-HCEs to use it.

For non-AMT payers, I think the benefits of the DCFSA are really not significantly better than the regular tax credit option (which if I recall are generally mutually exclusive). I haven’t studied the comparison for AMT payers, but that’s like a spot where DCFSA may shine.

I dislike all the hoop-jumping and paperwork that the FSA administrators generally require, and I mentally reduce the tax benefit vs. the leg-work cost. (Mine’s a high bar though. I’ve been too lazy to file the insurance paperwork and FSA paperwork and rebate paperwork for my costco eye exam so far…. And when I do, I’ll end up with a bunch of small-denomination checks in the mail that I have to deal with….)

[CA renter]

Cube, just a thought… I, too, hate all the paperwork and getting “pecked to death by ducks” involved with getting your money back, so I just do it once a year, either when we’ve maxed out the benefit, OR I wait until the last minute to file if we’ve not been able to max it out beforehand. Though you might have to spend an hour or two to get it done, it seems like time better spent when you do it all at once, as opposed to doing it every time you get a medical bill. Personally, I think it’s more efficient.

Also, being very organized really helps. I have one file per year for the FSA, and all of the explanation of benefits (EOBs) go in there, first. As I get the medical bills, I match up the EOB and bill when I pay them, and the stapled (or paper clipped, so they’re easier to scan later) bills/EOBs go in the back of the file. It makes it very easy to quickly calculate which bills I need to submit to get the max benefit, and scanning them into the computer (to send via email) is a snap. I often get just one or two decent-sized checks once a year, which makes managing the checks all that much easier.

Just my 2 cents. 🙂

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