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Application of Retroactive Increase in Excludible Transit Benefits, IRS Notice 2015-2

Enactment of the Tax Increase Prevention Act of 2014 (TIPA) restored parity of the monthly combined transit pass and commuter highway vehicle (vanpool) limit with the 2014 parking monthly limit by raising it from $130 to $250, retroactive for the period January 1, 2014 through December 31, 2014. The Internal Revenue Service (IRS) issued Notice 2015-2 outlining administrative procedures for employers to use in response to the TIPA retroactive increase in the transit monthly limit. This Notice provides procedures for employers who provided transit benefits in excess of $130 per month and less than or equal to $250 per month in the 2014 tax year. In order for employers to make adjustments for 2014, the Notice provides administrative procedures to follow. Below is a summary of IRS Notice 2015-2. We have also included a link to the Notice for your use.

PLEASE NOTE:
Beginning January 1, 2015, the monthly limit for transit and vanpooling, combined, is $130 for the 2015 calendar year.


The IRS has provided information indicating that employers must ensure that the amount of taxable income and wages reported on 2014 Form W-2 furnished to their employees and filed with the Social Security Administration (SSA) reflect the increased transit benefit exclusion of up to $250 per month per participating employee for transit benefits provided in 2014. This will avoid the requirement for employers having to make subsequent corrections to Forms W-2 as noted in Treasury Regulations section 31.6051-11 and 31.605-22.

Employers who provided transit benefits greater than $130 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 $250 per month; this will eliminate the need for employees to satisfy all the requirements for filing individual refund claims. See Notice 2015-2 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 TIPA, in light of the guidance in Notice 2015-2, 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 4th quarter returns for 2014. 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 4th 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 2014 with regard to the overpayment of tax.

To complete either process, Forms W-2 that are furnished to employees must take into account the increased exclusion of transit benefits in calculating the amount of reportable wages. More detailed instructions are provided below.

ACTION TO TAKE:
Read the "Employer Facts." If this notice applies to your 2014 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 2015-2 should also be read carefully.

Employer Facts:

  • Notice 2015-2 applies only to employers who provided transit benefits in excess of $130 per month and less than or equal to $250 per month in 2014. 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 $130 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 $117,000 for 2014.
  • Corrections are calculated based on employees' individual taxable transit benefits.

FORM 941
Employers who included excess transit benefits in gross income and wages and have not yet filed their fourth quarter Form 941 for 2014:

  • Repay or reimburse employees the over-collected employee's share of FICA taxes on the excess transit benefit for 2014.
  • Reduce the fourth quarter Wages, tips and compensation reported on line 2, Taxable social security wages reported on line 5a, Taxable Medicare wages and tips reported on line 5c and Taxable wages & tips subject to Additional Medicare Tax withholding by the excess transit benefits for 2014 (the excess for all four quarters of 2014).
  • Take into account the social security wage base limit of $117,000.

To ensure that use of this special administrative procedure does not result in a mismatch between the total taxes reported on Form 941, line 10, Total taxes after adjustments and the Total liability for the quarter reported on Form 941, Line 14 (for a monthly schedule depositor) or Schedule B (Form 941) (for a semiweekly schedule depositor), an employer should use the following procedure:

  • Reduce the last liability of the quarter reported (this is, Month 3 on line 14 or the last liability entry on Schedule B) by the amount of the tax reduction, due to use of the special administrative procedure.
  • If the amount of the tax reduction exceeds the last liability of the quarter reported on line 14 or Schedule B, the employer should apply the amount of the tax reduction to reduce previous liabilities in reverse order until the amount of the tax reduction is completely used.
  • Negative numbers must not be entered on Line 14 or Schedule B. 

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 already filed fourth quarter Form 941 must use Form 941-X and normal procedures to make an adjustment or claim a refund for any quarter in 2014.
  • Employers who, prior to filing the fourth quarter Form 941, have not repaid or reimbursed employees who received taxable excess transit benefits in 2014 must use Form 941-X.

This process 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.

Under the normal procedures, the employer must obtain the required statements under §§ 31.6413(a)-1 or 31.6402(a)-2 (subject to the exception for making reasonable efforts). The employer may not repay or reimburse, make any adjustment with respect to or seek a refund of Additional Medical Tax or income tax deducted or withheld from the employee in 2014.

FORMS W-2
In all cases, employers must report in box 2, Federal income tax withheld, the amount of income tax actually withheld during 2014.

Employers who have not furnished 2014 Forms W-2 to employees:

  • Take into account the increased exclusion for transit benefits in calculating the amount of wages reported in box 1, Wage, tips other compensation; box 3, social security wage; and box 5, Medicare wages & tips.
  • Employers who have repaid or reimbursed employees for the over-collected FICA taxes prior to furnishing Form W-2 (whether they utilized the special administrative procedure or the normal procedures must: 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.

Note that under the normal procedures, the amount reported in box 6, Medicare tax withheld, will not be reduced with regard to any Additional Medicare withheld on the excess transit benefits because no repayment or reimbursement of such amount is permitted after the end of 2014.

In all cases, employers must report in box 2, Federal income tax withheld, the amount of income tax actually withheld during 2014.

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 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 2014 Forms W-2 with SSA:

  • Need to file Form W-2c, Corrected Wage and Tax Statement to take into account the increased exclusion for transit benefits and to reflect any repayments or reimbursements of the withheld FICA tax and must furnish copies of Form W-2c to the employees.

1 § 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.

2 § 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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