The IRS has provided guidance in response to Congressional extension of retroactive parity for the exclusion of qualified parking costs on the one hand, and the exclusion for commuter highway vehicles and transit passes (transit benefits) on the other. As a result, the monthly maximum exclusion for transit benefits has been increased from $130 per participating employee to $250 per participating employee for the period from January 1, 2015, through December 31, 2015. The IRS’s guidance is provided for employers that want to take advantage of the change (nothing in the law requires any employer to do so).
For 2015, employers must reduce the taxable wages of affected employees, as reported on Forms 941 and W-2 and any equivalent forms, by the amount of any retroactively increased transit benefits (which the IRS calls “excess” benefits in its guidance). For example, if an employer gave an employee a monthly transit pass worth $200 for the month of December 2015 and included $70 in the employee’s taxable wages for the month for withholding purposes, the employer must subtract that $70 from the employee’s taxable wages reported on Forms 941 and W-2. As another example, if an employer maintained a salary reduction plan and an employee purchased a $200 transit pass for the month of December 2015 by way of a pre-tax deduction of $130 and a post-tax deduction of $70, the $70 post-tax deduction must be treated as a pre-tax deduction for purposes of reporting the employee’s taxable wages on Forms 941 and W-2.
Employers that 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. The IRS, however, is providing a special administrative procedure for employers that treated excess transit benefits as wages and that have not yet filed their fourth quarter Form 941 for 2015. Employers desiring to use this special administrative procedure must repay or reimburse their employees for the overcollected FICA tax (including any Additional Medicare Tax) on the excess transit benefits for all four quarters of 2015 upon or before filing the fourth quarter Form 941.
Employers that have already filed the fourth quarter Form 941 must use Form 941-X and normal procedures to make an adjustment or claim a refund for any quarter in 2015 with regard to the overpayment of tax on the excess transit benefits after repaying or reimbursing their employees or, for claims for refund, securing consents from their employees. Similarly, to the extent employers have not repaid or reimbursed their employees who received excess transit benefits in 2015 prior to filing the fourth quarter Form 941, the employers must use Form 941-X to make an adjustment or claim for refund with respect to the excess transit benefits provided to those employees and must follow the normal procedures.
Employers that paid excess transit benefits in 2015 and have not furnished 2015 Forms W-2 to their employees must take into account the increased exclusion for 2015 transit benefits in calculating the amount of wages reported in box 1, Wages, tips, other compensation; box 3, Social security wages; and box 5, Medicare wages and tips. Employers that 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 box 4, Social security tax withheld, and box 6, Medicare tax withheld, by the amounts of the repayments or reimbursements. Note that under the normal procedures, the amount reported in box 6, Medicare tax withheld, will not be reduced with regard to any Additional Medicare Tax withheld on the excess transit benefits because no repayment or reimbursement of such amount is permitted after the end of 2015. (Notice 2016-6, I.R.B. 2016-4, January 25, 2016.)
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