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Application of Retroactive Increase in Excludible Transit Benefits, IRS Notice 2013-8

Enactment of the American Taxpayer Relief Act (ATRA) restored parity of the monthly combined transit pass and commuter highway vehicle (transit) limit with the current parking monthly limit by raising it from $125 to $240, retroactive to January 2012. The Internal Revenue Service (IRS) issued Notice 2013-8 outlining administrative procedures for employers to use in response to the ATRA retroactive increase in the transit monthly limit from $125 to $240. This Notice provides procedures for employers who provided transit benefits in excess of $125 per month and less than or equal to $240 per month in the 2012 tax year. In order for employers to make adjustments for 2012, the Notice provides administrative procedures to follow. Below is a summary of IRS Notice 2013-8. We have also included a link to the Notice for your use.

PLEASE NOTE:
Beginning in January 2013, the monthly limit for both transit and parking was increased to $245 for the 2013 calendar year.

We have received questions about whether employers are required to make these adjustments or whether they are at an employer's discretion. In response to questions from employers, the IRS has provided additional information indicating that employers should ensure that the amount of taxable income and wages reported on 2012 Forms W-2 furnished to their employees and filed with the Social Security Administration (SSA) reflect the increased transit benefit exclusion of up to $240 per month per participating employee for transit benefits provided in 2012. This will avoid the requirement employers have to make subsequent corrections as noted in Treasury Regulation sections 31.6051-1 and 31.6051-2.

In addition, employers who provided transit benefits greater than $125 per month and treated the excess as wages should repay or reimburse their employees the FICA tax withheld from the employees on the excess up to $240 per month; this will the eliminate the need for employees to satisfy all the requirements for filing individual refund claims. See Notice 2013-8 for a special administrative procedure. Of course, Clients are urged, however, to also seek advice from their own legal and tax advisors.

For employers who need to take advantage of the retroactivity offered by ATRA in light of the guidance in Notice 2013-8, here are some practical steps to accomplish the re-characterization of amounts.

The bulk of the guidance relates to employers who originally reported excess transit benefits as includible in gross income and wages and withheld FICA taxes accordingly. There are two sets of instructions. There are instructions for a special administrative procedure for Form 941 filers who have not yet filed their fourth quarter returns for 2012. 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 benefit. There is a separate set of instructions detailing the procedure for filers who have already filed their fourth quarter Form 941 or have not repaid or reimbursed all employees. This procedure will require the employer to use a Form 941-X to make an adjustment or claim a refund for any quarter in 2012 with regard to the overpayment of tax.

To complete either process, Form W-2 must be correct prior to submitting them to affected employees, or corrected Form W-2 should be issued to affected employees if W-2s have already been provided. More detailed instructions are provided below.

ACTION TO TAKE:
Read the "Employer Facts." If this notice applies to your 2012 transit benefits, then review both the Form 941 and W-2 sections to determine your best course of action for your unique circumstances. IRS Notice 2013-8 should also be read carefully.

 

Employer Facts:

  • Notice 2013-8 applies only to employers who provided transit benefits in excess of $125 per month and less than or equal to $240 per month in 2012. It applies both if the transit benefits were paid directly from the employer or through employee salary reductions on a taxed basis. 

  • Employees must have made an election that was used for transit benefits in excess of the initial $125 transit limit. 

  • The FICA "fix" 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 social security wage base of $110,100 for 2012. 

  • Corrections are calculated based on employees' individual taxable transit benefits.

FORM 941 
Employers that included excess transit benefits in gross income and wages and have notyet filed their fourth quarter Form 941 for 2012:

  • Repay or reimburse employees the over-collected FICA taxes on the excess transit benefit for 2012. 
  • Reduce the fourth quarter Wages, tips and other 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 2012. 
  • Take into account the social security wage base limit of $110,100.

This procedure will allow employers to avoid having to file Forms 941-X and possibly, Forms W-2c.

Employers who have already filed Form 941 or have not repaid or reimbursed over-collected FICA taxes:

  • Employers who have filed fourth quarter Form 941 must use Form 941-X to make an adjustment or claim a refund for any quarter in 2012. 
  • Employers that, on or before filing the fourth quarter Form 941, have not repaid or reimbursed employees who received taxable excess transit benefits in 2012 must use Form 941-X.

This is in regard to the overpayment of tax on the excess transit benefits after reimbursing employees, or for refund claims, securing consents from its employees.

FORMS W-2 
In all cases, employers must report in box 2, Federal income tax withheld, the amount of income tax actually withheld during 2012.

Employers who have not furnished 2012 Forms W-2 to employees:

  • Take into account the increased exclusion for transit benefits in calculating the amount of wage reported in box 1, Wage, tips, other compensation; box 3, Social security wage; and box 5, Medicare wages and tips.

Employers who have repaid or reimbursed employees for the over-collected FICA taxes prior to furnishing Form W-2:

  • Reduce the amount 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.

Employers who repaid or reimbursed their employees for the over-collected FICA taxes after furnishing Form W-2 but before filing Forms W-2 with the Social Security Administration (SSA):

  • Check the "Void" box at the top of each incorrect Form W-2 (Copy A).
  • Prepare new forms W-2 with the correct information
  • Send new Forms W-2 (Copy A) to the SSA.
  • Write "Corrected" on the employees' new copies (B, C, and 2) and furnish to employees.

Employers who already filed 2012 Forms W-2 with SSA

  • Need to file Forms W-2c, Corrected Wage and Tax Statement to take into account the increased exclusion for transit benefits.

Notice 2013-8 can be found here.

The information contained in this memo is for general informational purposes only and does not constitute legal, accounting, or other professional advice. We assume no liability whatsoever in connection with its use, nor are these comments directed to specific situations. Please consult with your own legal and tax advisors for advice specific to your particular circumstances.


§ 31.6051-1 Statements for employees.

(c) Correction of statements--(1) Federal Insurance Contributions Act. If (i) the amount of employee tax under section 3101 deducted and withheld in the calendar year from the wages, as defined in section 3121(a), paid during such year was less or greater than the tax imposed by section 3101 on such wages by reason of the adjustment in such year of an over-collection or under-collection of the tax in any prior year, or (ii) regardless of the reason for the error or the method of its correction, the amount of wages as defined in section 3121(a), or tax under section 3101, entered on a statement furnished pursuant to this section to an employee for a prior year was incorrect, a corrected statement for such prior year reflecting the adjustment or the correct data shall be furnished to the employee. Such statement shall be marked "Corrected by Employer."

(2) Income tax withholding. A corrected statement shall be furnished to the employee with respect to a prior calendar year (i) to show the correct amount of wages, as defined in section 3401(a), paid during the prior calendar year if the amount of such wages entered on a statement furnished to the employee for such prior year is incorrect, or (ii) to show the amount actually deducted and withheld as tax under section 3402 if such amount is less or greater than the amount entered as tax withheld on the statement furnished the employee for such prior year. Such statement shall be indicated as corrected.

§ 31.6051-2 Information returns on Form W-3 and Internal Revenue Service copies of Forms W-2. 

(b) Corrected returns. The Social Security Administration copies of corrected Forms W-2 (or magnetic tape or other approved media) for employees for the calendar year shall be submitted with Form W-3 (or Form 4804), on or before the date on which information returns for the period in which the correction is made would be due under paragraph (a)(3)(ii) of § 31.6071(a)-1, to the Social Security Administration office with which Forms W-2 are required to be filed.

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