Employer Guidance Issued on Retroactive Increase in Excludable Transit Benefits for 2015.

(Parker Tax Publishing January 21, 2016)

To address employers' questions regarding the retroactive application of the increased transit benefits exclusion for 2015 pursuant to PATH, the IRS has issued guidance on how the increase applies and provided a special administrative procedure for employers to use in filing their fourth quarter Form 941, and Forms W-2. Notice 2016-6.

Background

Under Code Sec. 132(a)(5), the value of the qualified transportation benefits provided by an employer to an employee is excludable from the employee's gross income to the extent that value does not exceed certain dollar amounts. Excludable qualified transportation benefits include:

(1) transportation in a commuter highway vehicle between home and work;

(2) transit passes;

(3) qualified parking; and

(4) qualified bicycle commuting reimbursements.

Prior to the enactment of the Protecting Americans from Tax Hikes (PATH) Act of 2015 (Pub. L. 114-113), the adjusted maximum monthly amount excludable for 2015 for transportation in a commuter highway vehicle and/or any transit pass ("transit benefits") was $130 per participating employee and the adjusted maximum monthly amount excludable for qualified parking was $250. PATH permanently amended Code Sec. 132(f) to create parity in the amount of the exclusion for qualified transportation fringes. Accordingly, PATH increased the $130 maximum monthly excludable amount for transit benefits to equal the $250 maximum monthly excludable amount for qualified parking. The increase is effective for the period from January 1, 2015, through December 31, 2015.

OBSERVATION: For 2016, the monthly exclusion for both transit benefits and for qualified parking is $255.

Pursuant to the change made by PATH, transit benefits provided during 2015 by an employer to an employee in excess of $130 (the former maximum monthly excludable amount) up to $250 (the amended maximum monthly excludable amount) ("excess transit benefits") are excluded from the employee's gross income and wages. Neither Code Sec. 132, nor the change made by PATH, mandate that employers provide additional transit benefits to their employees for 2015, and employees may not retroactively increase their compensation reduction for 2015 to take advantage of the increase in the excludable amount for transit benefits in 2015.

Employers who originally reported excess transit benefits as includible in gross income and wages and withheld income taxes and FICA taxes would normally be required to file Form 941-X for each quarter to make corrections accounting for the increase in excludable transit benefits.

However, because of the year-end passage of PATH, and the fast-approaching due dates for fourth quarter Forms 941 and Forms W-2, the IRS has provided a special administrative procedure for employers who treated excess transit benefits as wages and that have not yet filed their fourth quarter Form 941 for PATH. Employers who choose to use this special administrative procedure must repay or reimburse their employees for the overcollected FICA tax on the excess transit benefits for all four quarters of 2015 on or before filing the fourth quarter Form 941.

OBSERVATION: Employers must act quickly in order to take advantage of this special procedure as the fourth quarter Form 941 is due on February 1, 2016.

Special Administrative Procedure

The procedure allows the employer, in reporting amounts on its fourth quarter Form 941, to reduce the fourth quarter wages reported on lines 2, 5a, 5c, and 5d by the excess transit benefits for all four quarters of 2015. By electing this special administrative procedure, employers will avoid having to file Forms 941-X, and will also avoid having to file Forms W-2c. Additionally, employers using this special procedure do not need to obtain written statements from their employees confirming the employee did not, and will not, make a claim for a refund of FICA tax. This procedure can only be used to the extent that employers have repaid or reimbursed their employees for the employee share of FICA tax attributable to the excess transit benefits.

Practice Tip: Employers who have already filed the fourth quarter Form 941 must use Form 941-X and follow normal procedures to make an adjustment or claim a refund for any quarter in 2015 with regard to the overpayment of tax relating to excess transit benefits.

Employers who paid excess transit benefits and have not furnished 2015 Forms W-2 to their employees must take into account the increased exclusion for transit benefits in calculating the amount of wages reported. Employers who have repaid or reimbursed their employees for the overcollected FICA taxes prior to furnishing Form W-2 (whether they utilized the special administrative procedure or the normal procedures) must reduce the amounts of withheld tax reported. In all cases, employers must report the amount of income tax actually withheld during 2015. The additional income tax withholding will be applied against the taxes shown on the employee's individual income tax return.

Employers who repaid or reimbursed their employees for the overcollected FICA taxes after furnishing Forms W-2 to their employees, but before filing Forms W-2 with the Social Security Administration (SSA), must check the "Void" box at the top of each incorrect Form W-2 (Copy A). The employer must prepare new Forms W-2 with the correct information, and send those new Forms W-2 (Copy A) to the SSA. Employers who have already filed 2015 Forms W-2 with SSA must file Forms W-2c, Corrected Wage and Tax Statement, to take into account the increased exclusion for transit benefits and to reflect any repayments or reimbursements of the withheld FICA tax and must furnish copies of Form W-2c to the employees.

For a discussion of transit benefits excluded from income, see Parker Tax ¶123,140. (Staff Editor Parker Tax Publishing)

Disclaimer: This publication does not, and is not intended to, provide legal, tax or accounting advice, and readers should consult their tax advisors concerning the application of tax laws to their particular situations. This analysis is not tax advice and is not intended or written to be used, and cannot be used, for purposes of avoiding tax penalties that may be imposed on any taxpayer. The information contained herein is general in nature and based on authorities that are subject to change. Parker Tax Publishing guarantees neither the accuracy nor completeness of any information and is not responsible for any errors or omissions, or for results obtained by others as a result of reliance upon such information. Parker Tax Publishing assumes no obligation to inform the reader of any changes in tax laws or other factors that could affect information contained herein.

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