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Application of Retroactive Increase in Excludible Transit Benefits, IRS Notice 2016-6

Enactment of the Consolidated Appropriations Act of 2015 (the Act) permanently allowed for parity of the monthly combined transit pass and commuter highway vehicle (vanpool) limit with the 2015 parking monthly limit by raising it from $130 to $250, retroactive for the period January 1, 2015 through December 31, 2015. The Internal Revenue Service (IRS) issued Notice 2016-6 outlining special administrative procedures for employers to use in response to the Act’s 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 2015 tax year. In order for employers to make adjustments for 2015, the Notice provides administrative procedures to follow. Below is a summary of IRS Notice 2016-6. We have also included a link to the Notice for your use.

PLEASE NOTE: Beginning January 1, 2016, the monthly limit for transit and vanpooling, combined, is $255 for the 2016 calendar year.

The IRS has provided information indicating that employers must reduce the taxable wages of affected employees, as reported on 2015 Forms 941 and W-2, by the amount of any excess transit benefits. Excess transit benefits are benefits provided by an employer during 2015 to an employee in excess of $130 up to $250 per month. Affected employees are those to whom an employer provided such excess transit benefits.

If you have affected employees to whom you provided excess transit benefits, please see Notice 2016-6 for special administrative procedures. 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 the Act, in light of the guidance in Notice 2016-6, 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 2015. 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.

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 2015 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 2016-6 should also be read carefully.

Employer Facts:

  • Notice 2016-6 applies only to employers who provided transit benefits in excess of $130 per month and less than or equal to $250 per month in 2015. 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 (pretax and post-tax benefits).
  • 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 $118,500 for 2015.
  • 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 2015:

  • Repay or reimburse employees the over-collected employees’ share of FICA taxes on the excess transit benefit for all four quarters of 2015. Repayment or reimbursement must take place before the filing of 4th quarter Form 941.
  • Reduce the 4th 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 2015 (the excess for all four quarters of 2015).
  • Take into account the social security wage base limit of $118,500.

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 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 4th quarter Form 941 must use Form 941-X and normal procedures to make an adjustment or claim a refund for any quarter in 2015.
  • Employers who, on or before filing the 4th quarter Form 941, have not repaid or reimbursed employees who received taxable excess transit benefits in 2015 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 an adjustment with respect to, or seek a refund of, Additional Medicare Tax or income tax deducted or withheld from the employee in 2015.

FORMS W-2

In all cases, employers must report in box 2, Federal income tax withheld, the amount of income tax actually withheld during 2015.

Employers who have not furnished 2015 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 and 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 2015.

In all cases, employers must report in box 2, Federal Income tax withheld, the amount of income tax actually withheld during 2015.

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 employees’ new copies (B, C, and 2) and furnish to employees.

Employers who already filed 2015 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 employees.

OTHER THINGS TO CONSIDER

  • Employees may not reduce their compensation by more than $255 per month in 2016 (the applicable statutory monthly limit for 2016) in order to receive any permissible reimbursement for transit expenses incurred in 2015.
  • The Act does not separately provide that additional benefits provided to employees in 2016 to compensate employees for transit expenses incurred in 2015 are automatically excludable from income.

Click here for a downloadable copy of this report.