Best case scenario for me. They are even refunding the withholding from last Friday's pay day.
I am not familiar with medical FSAs, but here's how it worked for the dependent care account when we inadvertently doubled up on our election. Since we actually spent more than we had withheld, we each were able to submit dependent care expenses and retrieve the funds back from our employers during the course of the year. At tax time (we used turbotax), the amount over and above the allowable withholding was simply added back to line 7 of our 1040 with a 'DCB' coded added to the line. There was no penalty I don't think, other than having to pay taxes on the excess over the limit (which makes logical sense).
I'm not 100% sure we handled it right, but I was fairly comfortable with it based on the research I did on it at the time. Again, dependent care has different rules than medical, but maybe this is helpful to you. This of course is not the advice of a professional.
My wife's plan year runs 1/1 - 12/31 and mine from 7/1 - 6/30. We used to both take some out, but the accounting was mess as our expenses didn't line up.
If I remember correctly, when I had a bit more than was allowed, I just paid the taxes on it. So, if you know you are going to have 10K in expenses for the year that you can get reimbursed, you should probably be OK - if they are valid expenses and you ARE NOT getting paid for them 2x (i.e., claiming the same expense against both accounts), you are not breaking any rules. You are, however, under-withholding taxes and when you do your forms in 14 for Tax Year 2013, you'll owe a chunk on that $5000 that should have been taxed.
You can, always go back and up your withholding if you don't wan to owe at the end.
NOTE: I am a taxpayer and not a preparer or an Accountant. I do, however, know that Turbo Tax led me through this a few years ago.
I don't know why that would be the case. What I have read is tht you get to use the $5,000,
File form 2441 and lose the tax deduction.
On a practical level, how are two employers supposed to deny reimbursement throughout the year?
That's a life change for sure.