IRS Issues Guidance on How to Apply the Retroactive Increase in Excludable Transit Benefits

Author: Rena Pirsos, XpertHR Legal Editor

The Internal Revenue Service (IRS) has issued guidance regarding the increase in the monthly transit benefit exclusion amount under Internal Revenue Code (IRC) § 132(f)(2)(A), as enacted by the American Taxpayer Relief Act of 2012 (Pub. L. 112-240). The guidance clarifies how the increase applies for 2012 and provides special administrative procedures 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. +IRS Notice 2013-8, Jan. 16, 2013.

Background

Before ATRA 2012 was signed into law, the maximum monthly excludable amount for 2012 for qualified employer-provided transit benefits, i.e., transportation in a commuter highway vehicle, such as a van pool, and transit passes, under +IRC § 132(f) was $125 and the maximum monthly exclusion for qualified parking was $240. ATRA 2012 increased the transit benefits maximum to $240, making it equal to the maximum for qualified parking, effective retroactively from January 1, 2012 through December 31, 2013. Thus, the maximum monthly exclusion for all qualified transit benefits for 2012 is $240. For 2013, the IRS adjusted the excludable amount for inflation to $245.

Because the increase is retroactive to January 1, 2012, any employer-provided transit benefits that exceeded $125, up to 240 per month, in 2012 are now excludable from employees' taxable wages for purposes of federal income tax withholding and Social Security and Medicare (FICA) taxes. The exclusion applies whether an employer provided the transit benefits out of its own funds or through a salary reduction arrangement. But for the IRS's special administrative procedures, employers that included the excess amounts in employees' gross income and wages and withheld federal income and FICA taxes would have to correct the withholding by filing Form 941-X, Adjusted Employer's Quarterly Federal Tax Return or Claim for Refund, for each applicable quarter of 2012.

Special Administrative Procedures

The IRS's special procedures apply to:

  1. Employers that have not yet filed their fourth quarter Form 941 for 2012 and need to make adjustments;
  2. Employers that have already filed the fourth quarter Form 941 or have not repaid or reimbursed all employees; and
  3. Employers that have not yet furnished 2012 Forms W-2, Wage and Tax Statement, to their employees.

Employers that have not yet filed their fourth quarter Form 941 for 2012 and need to make adjustments.

  • Before using the special procedure, an employer must repay or reimburse its employees the overcollected FICA tax on the excess transit benefits for all four quarters of 2012 by the time it files 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. The repayment or reimbursement of overwithheld Social Security tax and the corresponding reduction for line 5a wages must take into account that refunds or credits of Social Security tax are limited to the amount paid on that portion of the excess transit benefits that, when added to other wages for the year, did not exceed the 2012 Social Security taxable wage base of $110,100.
  • An employer can only correct the employer share of FICA tax that corresponds to the employees' share of FICA tax that has been repaid or reimbursed to its employees. Employers 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, that the claim was rejected) and will not make a claim for refund of FICA tax overcollected in a prior year.
  • By taking advantage of this procedure, employers will avoid having to file Forms 941-X and Forms W-2c, Corrected Wage and Tax Statement.

Employers that have already filed the fourth quarter Form 941 or have not repaid or reimbursed all employees.

  • Employers that have already 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.

Employers that have not yet furnished 2012 Forms W-2 to their employees.

  • Employers that have not furnished 2012 Forms W-2, Wage and Tax Statement, 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 Forms 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, 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 employees' individual income tax returns.
  • Employers that 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), should check the "Void" box at the top of each incorrect Form W-2 (Copy A). The employer should prepare new Forms W-2 with the correct information, and send them (Copy A) to the SSA. Employers also should write "CORRECTED" on the employees' new copies (B, C and 2), and furnish them to the employees.
  • Employers that have already filed 2012 Forms W-2 with the SSA must file Forms W-2c to take into account the increased exclusion for transit benefits.

Additional Resources

Impact of the American Taxpayer Relief Act of 2012 on Payroll

Payroll > Taxation of Employee Compensation

Payroll > Depositing and Reporting Withheld Taxes