FSA Tax Reporting Requirements

Flexible Spending Accounts occupy a distinct position in the tax code — the tax benefits are real, but the reporting obligations fall primarily on employers and plan administrators rather than individual account holders. Understanding exactly who files what, under which IRS forms and code sections, prevents compliance gaps that can trigger penalties for employers and unexpected tax liability for employees. This page covers the full reporting framework for health care FSAs and dependent care FSAs, including the key distinctions between account types, the forms involved, and the decision points that determine when additional reporting is required.

Definition and scope

A Flexible Spending Account derives its tax treatment from Internal Revenue Code Section 125, which governs cafeteria plans. Under Section 125, employees elect to redirect pre-tax salary into an FSA, reducing gross income subject to federal income tax, Social Security tax, and Medicare tax. Because the tax exclusion occurs at the point of contribution — before wages are recognized — the IRS reporting structure for FSAs differs fundamentally from HSA reporting, where individual account holders file Form 8889 with their personal returns.

FSA tax reporting breaks into two distinct tracks based on account type:

Health Care FSA (HCFSA) — governed by IRC §105 and §125; no separate information return is filed with the IRS for the employee.
Dependent Care FSA (DCFSA) — governed by IRC §129; requires employer reporting on Form W-2 and employee reporting on Form 2441.

The regulatory context for health savings makes clear that FSAs are employer-sponsored arrangements, meaning the plan sponsor — not the individual — bears primary compliance responsibility under the Employee Retirement Income Security Act (ERISA) where applicable, and under the Internal Revenue Code for tax reporting purposes.

How it works

Employer reporting obligations

The employer's primary FSA reporting obligation runs through payroll. Because FSA salary deferrals reduce W-2 Box 1 wages, the tax benefit is embedded in the W-2 itself rather than captured on a separate form. There is no IRS information return analogous to Form 5498-SA (used for HSAs) that reports FSA contributions independently.

For Dependent Care FSAs, the employer must report the total amount of dependent care benefits provided — including FSA contributions and any direct employer contributions — in W-2 Box 10. The IRS requires this disclosure under IRC §129(d)(6). The 2024 W-2 instructions from the IRS specify that all dependent care assistance program amounts, regardless of whether they fall within the exclusion limit, must appear in Box 10.

Employee reporting obligations

For health care FSAs, employees generally have no additional tax form to file. The salary reduction does not appear as a separate line item on the 1040; it is simply absent from Box 1 of the W-2.

For dependent care FSAs, employees must complete Form 2441 (Child and Dependent Care Expenses), attaching it to their Form 1040. Form 2441 reconciles the amount shown in W-2 Box 10 against the statutory exclusion limits set under IRC §129(a). If the amount in Box 10 exceeds the exclusion limit — $5,000 for married filing jointly or single filers, or $2,500 for married filing separately, per IRS Publication 503 — the excess becomes taxable income reported on Schedule 1.

Plan-level reporting

Employers sponsoring FSAs as part of a Section 125 cafeteria plan must also consider Form 5500 filing requirements. Plans with 100 or more participants at the beginning of the plan year must file Form 5500 with the Department of Labor (DOL). Plans with fewer than 100 participants may qualify for the Form 5500-SF short form or, under certain conditions, may be exempt from Form 5500 filing entirely if the FSA is an unfunded welfare benefit plan.

Common scenarios

Scenario 1: Employee uses all HCFSA funds during the plan year
No additional tax reporting is required for the employee. The pre-tax contribution reduced Box 1 wages on the W-2. No form is filed beyond the standard 1040, and no FSA-specific line appears on the return.

Scenario 2: Employee receives dependent care FSA benefits of $5,000 (married filing jointly)
The employer reports $5,000 in W-2 Box 10. The employee completes Form 2441. Because $5,000 equals the IRC §129 exclusion limit for that filing status, no additional tax is owed on the FSA amount. The form is still required to substantiate the exclusion.

Scenario 3: Employee receives $6,000 in dependent care FSA benefits
The employer reports $6,000 in W-2 Box 10. The employee completes Form 2441. The $1,000 excess above the $5,000 limit is includable in gross income and flows to Schedule 1 as additional wages. The employee owes income tax — and potentially self-employment or payroll taxes — on that $1,000.

Scenario 4: FSA funds remain unused at year-end (use-it-or-lose-it)
Forfeited FSA funds are not taxable income to the employee and generate no tax reporting obligation. The employer retains the forfeited amounts, which may be used to offset plan administrative costs under IRS Notice 89-80 or redistributed within limits set by the plan document.

Scenario 5: Mid-year FSA election change
Permitted election changes under IRC §125 do not create independent reporting obligations, but they must be documented in the plan's Section 125 cafeteria plan document. The IRS rules governing FSAs specify the qualifying life events that permit mid-year changes; elections made outside permitted circumstances result in the contributions losing their pre-tax status.

Decision boundaries

The following decision framework clarifies which reporting obligations apply in which circumstances:

Is the account a health care FSA or a dependent care FSA?
Health care FSA → no employee information return; employer embeds exclusion in W-2 Box 1 reduction.
Dependent care FSA → employer reports in W-2 Box 10; employee files Form 2441.
Does the dependent care FSA amount exceed the IRC §129 exclusion limit?
At or below limit ($5,000 for most filers; $2,500 married filing separately) → excluded from income; Form 2441 still required.
Above limit → excess is taxable; reported on Schedule 1 of Form 1040.
Does the cafeteria plan have 100 or more participants?
100 or more → Form 5500 filing required with the DOL.
Fewer than 100 → Form 5500-SF may apply, or filing exemption may be available for unfunded plans.
Did any employee receive discriminatory benefits under the FSA?
If the plan fails IRC §125 nondiscrimination testing (for highly compensated employees) or IRC §129 nondiscrimination testing (for dependent care), the affected employees lose the pre-tax exclusion and the employer must include the value in those employees' W-2 Box 1 income.
Did the employer make contributions to the FSA in addition to salary deferrals?
Employer contributions to a health care FSA are excluded from income under IRC §106 and do not appear separately on the W-2.
Employer contributions to a dependent care FSA are included in W-2 Box 10 and count toward the §129 exclusion limit.

The main resource index for health savings accounts and FSAs organizes these regulatory frameworks alongside HSA and HRA compliance topics for plan administrators navigating multi-account arrangements.

References

The law belongs to the people. Georgia v. Public.Resource.Org, 590 U.S. (2020)