IRS Issues Guidance On Application Of Retroactive Increase In Excludable Transit Benefits

In Notice 2013.-8,t he Internal Revenue Service has provided guidance with respect to issues related to the enactment of the American Taxpayer Relief Act of 2012 (ATRA; P.L. 112-240), which increased the monthly transit benefit exclusion under Code Sec. 132(f)(2)(A) from $125 per participating employee to $240 per participating employee for the period of Jan. 1, 2012 through Dec. 31, 2012.

To address employers’ questions regarding the retroactive application of the increased exclusion for 2012 and to reduce filing and reporting burdens, the IRS is clarifying how the increase applies for 2012 and is providing a special administrative procedure for employers to use in filing Form 941, Employer’s Quarterly Federal Tax Return, for the fourth quarter of 2012 to reflect changes in the excludable amount for transit benefits provided in all quarters of 2012 and in filing Forms W-2, Wage and Tax Statement.

Changes in the excludable amount. ATRA amended Sec. 132(f)(2) to increase the maximum monthly excludable amount for employer-provided commuter highway vehicle transportation and transit pass benefits to an amount equal to the maximum monthly excludable amount for qualified parking. The amendment is effective retroactively beginning on Jan. 1, 2012, and extending through Dec. 31, 2013. Rev. Proc. 2013-15 clarified that the maximum monthly excludable amount for employer-provided commuter highway vehicle transportation and transit pass benefits for 2012 is $240 (and $245 in 2013).

Amounts that are excluded from gross income under Sec. 132 also are excluded from Federal Insurance Contributions Act (FICA) taxes (both Social Security and Medicare) and federal income tax withholding. Generally, corrections of overpayments of FICA tax are made after an error has been ascertained using the adjustment process under Code Sec. 6413 or using the refund claim process under Code Sec. 6402. An error is ascertained when the employer has sufficient knowledge of the error to be able to correct it.

Excess transit benefits. The notice addresses employers who provided transit benefits in excess of $125 per month and less than or equal to $240 per month in 2012. “Transit benefits” refers to the aggregate benefit of transportation in a commuter highway vehicle and transit passes. Pursuant to the change made by ATRA, which was retroactive to Jan. 1, 2012, any transit benefits provided by an employer to an employee in excess of $125 (the former maximum monthly excludable amount) up to $240 (the amended maximum monthly excludable amount) are excluded from the employee’s gross income and wages. These excess amounts are referred to as “excess transit benefits” in the notice. The exclusion applies whether the employer provided the transit benefits out of its own funds or whether the transit benefits were provided through salary reduction arrangements as permitted by Code Sec. 132(f)(4).

Special administrative procedure. The IRS 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 2012. Employers who desire to use this special administrative procedure must repay or reimburse their employees the overcollected FICA tax on the excess transit benefits for all four quarters of 2012 on or before filing the fourth quarter Form 941. The employer, in reporting amounts on its fourth quarter Form 941, may reduce the fourth quarter wages, tips, and compensation reported on line 2, taxable Social Security wages reported on line 5a, and Medicare wages and tips reported on line 5c, by the excess transit benefits for all four quarters of 2012. By taking advantage of this special administrative procedure, employers will avoid having to file Forms 941-X, and also will avoid having to file Forms W-2c.

The notice provides that 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. Under this special administrative procedure, employers may only correct the employer share of FICA tax that corresponds to the employees’ share of FICA tax that has been repaid or reimbursed to the employees. Employers using this special procedure do not need to obtain written statements from their employees confirming, for each employee, that the employee did not make a claim (or if the employee did make a claim, the claim was rejected) and will not make a claim for refund of FICA tax overcollected in a prior year.

Instructions if fourth quarter Form 941 has been filed. Employers that have filed the fourth quarter Form 941 must use Form 941-X to make an adjustment or claim a refund for any quarter in 2012 with regard to the overpayment of tax on the excess transit benefits after repaying or reimbursing the employees or, for refund claims, securing consents from its employees. Similarly, employers that, on or before filing the fourth quarter Form 941, have not repaid or reimbursed some or all employees who received excess transit benefits in 2012 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.

Form W-2 instructions. Employers that have not furnished 2012 Forms W-2 to their employees should take into account the increased exclusion for 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 should 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. In all cases, however, employers must report in box 2, federal income tax withheld, the amount of income tax actually withheld during 2012. The additional income tax withholding will be applied against the taxes shown on the employee’s individual income tax return (Form 1040, U.S. Individual Income Tax Return).

Employers that have already filed 2012 Forms W-2 with SSA will need to file Forms W-2c, Corrected Wage and Tax Statement, to take into account the increased exclusion for transit benefits.

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