Guidance on Retroactive Parity for Mass Transit, Parking Benefits Issued by IRS

Author: Alice Gilman

January 12, 2015

In Notice 2015-2, the IRS has provided much anticipated special administrative procedures applicable to fourth-quarter 2014 Form 941, Employer's Quarterly Federal Tax Return, and 2014 Form W-2, Wage and Tax Statement, for employers that allowed employees to defer more than $130 a month for mass transit benefits in 2014. The IRS warns that employees may neither retroactively increase their 2014 pretax deductions, nor defer more than $130 a month for mass transit fringe benefits, for 2015.

The guidance was expected after the Tax Increase Prevention Act of 2014 (P.L. 113-295) retroactively reinstated parity for qualified employer-provided parking and mass transit benefits (up to $250 a month) for 2014, just when employers were closing out their 2014 payrolls. Previously, employees could defer up to $250 a month in qualified parking benefits and up to $130 a month in qualified mass transit benefits on a pretax basis.

Special Procedure for Fourth-Quarter 2014 Form 941

Employees who deferred more than $130 a month in after-tax dollars for mass transit benefits are now due refunds of the Social Security and Medicare (FICA) taxes attributed to those excess transit benefits. Under the special administrative procedure, an employer must repay or reimburse employees for overwithheld FICA taxes, including overwithheld additional Medicare tax (AMT).

An employer does not have to obtain written statements from employees indicating that the employees will not seek a refund of those taxes. Having repaid or reimbursed employees for their share of FICA taxes, an employer can only seek a refund of the employer portion of FICA taxes.

An employer does not have to file Form 941-X, Adjusted Employer's Quarterly Federal Tax Return or Claim for Refund, for each calendar quarter of 2014 to correct the overwithheld taxes. Instead, on the fourth-quarter Form 941, an employer may reduce the following amounts by the excess transit benefit amount for all four quarters of 2014:

  • Wages, tips, and other compensation reported on line 2;
  • Taxable Social Security wages reported on line 5a (up to the $117,000 2014 Social Security taxable wage base);
  • Taxable Medicare wages and tips reported on line 5c; and
  • Taxable wages and tips subject to the AMT on line 5d.

To ensure that using the special administrative procedure does not result in a mismatch between the total taxes reported on line 10 of Form 941and the total liability reported for the quarter, an employer must take one of the following two actions, depending upon its tax deposit schedule:

  • Monthly depositors should reduce the last liability of the quarter (i.e., Month 3 on line 14) by the amount of the tax reduction. If the amount of the tax reduction exceeds the Month 3 liability, the employer should apply the amount of the tax reduction backwards until the tax reduction is exhausted.
  • Semiweekly depositors should reduce the last liability entry on Schedule B of Form 941 by the amount of the tax reduction. If the tax reduction amount exceeds the last liability entry, the employer should apply the tax reduction amount backwards until the tax reduction is exhausted.

Instructions for Correcting Employees' 2014 Forms W-2

An employer that has not yet furnished 2014 Forms W-2 to its employees must decrease the amounts reported in the following boxes by the excess transit benefits:

  • Box 1, Wages, tips, other compensation;
  • Box 3, Social Security wages (up to the 2014 $117,000 taxable wage base); and
  • Box 5, Medicare wages and tips.

Likewise, an employer must decrease the amounts reported in box 4, Social Security tax withheld, and box 6, Medicare tax withheld, by the amount of its repayment or reimbursement.

An employer must comply with any requests from employees who terminated in 2014 for their copies of Form W-2 before the regular January 31 due date. An employer that repaid or reimbursed such employees for their overwithheld taxes after furnishing their Forms W-2, but before filing the forms, must check the "Void" box at the top of each terminated employee's incorrect Form W-2 (Copy A).

The employer also must prepare and provide new Forms W-2 to the employees with the correct information and with the word "CORRECTED" written on the new copies (copies B, C, and 2). The employer also must file the corrected copies with the Social Security Administration by the regular due dates (March 2 for paper filers, or March 31 for electronic filers).

In all cases, an employer must report the amount of income taxes that were actually withheld during 2014 in box 2, Federal income tax withheld. In other words, an employer may not reduce this amount by the excess income taxes that were withheld and must now be refunded to employees. The overwithheld income taxes will be applied against the taxes shown on each employee's Form 1040, U.S. Individual Income Tax Return.