Question: An employee signed up for a cafeteria plan health flexible spending account (FSA). Last February, she had back surgery, which meant that she was reimbursed for the full amount of her annual election. She quit before the balance of her elective deferral could be withheld from her pay. Must we report the amount paid out to her from the FSA, but not yet deducted from her pay, on her W-2?
Answer: FSAs have a risk-shifting aspect under which accounts must pay out the full amount of an employee’s elective deferral, even if the employee hasn’t yet had the full amount withheld. The bottom line is that if the employee terminates, the employer is out of luck and can’t get back any of that money. As for W-2 reporting, her Box 1 wages are reduced by her pretax contribution, as you would reduce Box 1 amounts for any pretax contribution.