IRS Issues Guidance on Retroactive Increase in Excludable Transit Benefits

Author: Rena Pirsos, XpertHR Legal Editor

January 12, 2016

The Protecting Americans From Tax Hikes (PATH) Act of 2015 amended § 132(f)(2) of the Internal Revenue Code (IRC) to equalize the transit benefit exclusion amounts for (i) transportation in a commuter highway vehicle and transit passes, and (ii) the exclusion for qualified parking benefits provided by an employer to an employee for periods after December 31, 2014. As a result, the monthly exclusion amount for transportation in a commuter highway vehicle and transit passes increased from $130 per employee to $250 per employee retroactively for all of 2015, and to $255 for 2016. In addition, the exclusion amount for qualified parking increased from $250 (in 2015) to $255 for 2016. The Act also made this equalization permanent as of January 1, 2016.

To address employer questions regarding the retroactive application of the increased exclusion amount for 2015 and to reduce employer filing and reporting burdens, the IRS has issued Notice 2016-06. The Notice clarifies how the increase applies for 2015 and provides a special administrative procedure for employers to use in filing the fourth quarter 2015 Form 941, Employer's Quarterly Federal Tax Return, to reflect changes in the exclusion amount for transit benefits provided in all quarters of 2015, and in filing Form W-2, Wage and Tax Statement.

Adjusting Fourth Quarter 2015 Forms 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 these employees for overwithheld FICA taxes, including overwithheld additional Medicare tax (AMT).

An employer does not have to obtain a written statement from each employee indicating that the employee will not seek a refund of those taxes. Having repaid or reimbursed an employee for his or her 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 2015 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 2015:

  • Wages, tips, other compensation, reported on line 2;
  • Taxable Social Security wages, reported on line 5a (up to the 2015 Social Security taxable wage base of $118,500);
  • 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 941 and the total liability reported on line 14 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.

Correcting 2015 Forms W-2

An employer that has not yet furnished 2015 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 2015 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 that repaid or reimbursed employees for their overwithheld FICA taxes after furnishing their Forms W-2, but before filing the forms with the Social Security Administration (SSA), must check the "Void" box at the top of each 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 31 for electronic filers).

In all cases, an employer must report the amount of income taxes that were actually withheld during 2015 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.