United States: IRS Provides Guidance On Retroactive Transit Benefit Adjustments For 2015

On December 18, 2015, Congress passed the Consolidated Appropriations Act, 2016 (Public Law No. 114-113) which amended the Internal Revenue Code to retroactively (and permanently) adjust the limits on qualified transportation fringe benefits. On January 11, 2016, the Internal Revenue Service issued Notice 2016-6 to address employers’ questions regarding the retroactive application of the increased exclusion for 2015.

Code Section 132 excludes qualified transportation fringe benefits from gross income, including:  (1) transportation in a commuter highway vehicle between home and work, (2) transit passes, and (3) qualified parking.  Prior to the Act, the maximum monthly amount excludable from gross income was  $250 per month for qualified parking, and $130 for transportation in a commuter highway vehicle and transit passes combined (collectively, “transit benefits”).  The Act amended Code Section 132(f) to equalize the income exclusions for parking expenses and transit benefits retroactive to January 1, 2015.

As a result of this amendment, the maximum monthly exclusion for transit benefits are as follows: 

Type of Benefit Prior 2015 Monthly Limit New 2015 Monthly Limit 2016 Monthly Limit
Transit Benefits $130 $250 $255
Qualified Parking $250 $250 $255

Employer Instructions for W-2s

Employers that paid transit benefits in excess of the prior $130 limit must reduce the taxable wages of affected employees reported in Form W-2 box 1, Wages, tips, other compensation; box 3, social security wages; and box 5, Medicare wages by the amount of transit benefits provided, up to $250.  Similarly, if an employee purchased transit benefits through a salary reduction plan in excess of the prior $130 limit (e.g. purchased a transit pass for the month with a pre-tax deduction of $130 and a post-tax deduction of $70), the deduction in excess of $130 (up to $250) must be treated as a pre-tax deduction. (The Notice provides that employees may not, however, retroactively increase their compensation reduction elections to take advantage of the retroactive increase.)

  • Employees are entitled to a refund or reimbursement of social security and Medicare (other than Additional Medicare) taxes paid on the excess transit benefits, but not a refund of over-withheld income or Additional Medicare taxes.  Excess income taxes withheld will be applied against taxes due on the employee’s individual tax return.
  • Employers that reimburse employees for over-withheld social security and Medicare taxes prior to furnishing Forms W-2 must reduce the amounts of withheld tax reported in box 4, social security tax withheld, and in box 6, Medicare tax withhold, by the amount of the reimbursement.  All employers must report in box 2, Federal income tax withheld, the actual amount of income taxes withheld during 2015.
  • Employers that reimburse employees after furnishing Forms W-2, but before filing Forms W-2 with the Social Security Administration (SSA), must check the “Void” box at the top of each incorrect Form W-2 (Copy A).  The employer must prepare new Forms W-2 and send them to the SSA.  “Corrected” should be written on the new copies (B, C and 2) and furnished to employees.  
  • Employers that have already filed their 2015 Forms W-2 with SSA must file Corrected Wage and Tax Statements, Forms W-2c, to reflect the increased exclusion for transit benefits and to reflect any reimbursements of the FICA tax.  Employees may recoup any Federal/State over-withholding with the filing of their personal income tax returns for 2015.

Recouping Employment Tax Overpayments - Special Procedure

An employer may obtain a refund of overpaid employment taxes on an employee’s behalf.  Employers that originally reported excess transit benefits as includible in gross income and withheld FICA taxes would normally be required to file Form 941-X for each quarter to make corrections.  However, under a special rule, the adjustment can be made on the fourth quarter Form 941 without filing Form 941-X or obtaining the employee statements if the employer has not yet filed its Form 941 for the fourth quarter of 2014.  (The fourth quarter Form 941 is due February 1, 2016, with 10 additional days permitted if the employers taxes are deposited on time).  See http://www.irs.gov/Businesses/Small-Businesses-&-Self-Employed/Employment-Tax-Due-Dates.

Procedure for Employers Who Have Filed Fourth Quarter Form 941 or Have Not Reimbursed Employees Prior to Fourth Quarter Form 941

Employers that have already filed fourth quarter Form 941, or have not reimbursed their employees who received excess transit benefits prior to filing the fourth quarter Form 941, must use Form 941-X and obtain a statement from employees confirming that the employee has not and will not seek a refund of over-withheld amounts.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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