How Employers Should Handle Retroactive Reinstatement of Transit Benefits Parity

The IRS issued procedures for employers to use to handle the retroactive application of the increased amount of the 2015 income exclusion for monthly transit benefits. The Consolidated Appropriations Act, 2016, P.L. 114-113, retroactively reinstated parity between the benefits for parking and the benefit for transportation in a commuter highway vehicle or for a transit pass for 2015 under Sec. 132. It also made the parity permanent.

The parity expired at the end of 2014, so for all of 2015 the maximum that could be excluded from income for transportation in a commuter highway vehicle or for a transit pass was $130 per month, while the amount allowed for parking was $250 per month. As a practical matter, taxpayers received their benefits for 2015 at these rates, and it was unclear what the mechanism would be to refund the income and Federal Insurance Contributions Act (FICA) taxes paid on amounts that would have been excluded from income under the higher $250-a-month level (referred to as “excess transit benefits”). For the first time, the legislation extending the parity also made it permanent, so the IRS also announced the amount of the exclusion for both types of benefits for 2016 is $255, adjusted for inflation.

On Tuesday, the IRS released Notice 2016-6 to provide simplified procedures for employers to use in filing Form 941, Employer’s Quarterly Federal Tax Return, for the fourth quarter of 2015 to reflect changes in the excludable amount for transit benefits provided in all quarters of 2015, and in filing Forms W-2, Wage and Tax Statement.

The procedures address only the overcollected FICA taxes resulting from the lower transit benefit amount. In cases of overcollected FICA tax, employers are generally required to repay or reimburse to employees the amount of overcollected FICA tax. However, employers cannot adjust overpayments of income tax after the end of the calendar year (Regs. Sec. 31.6413(a)-1(b)). In addition, although employers can refund overcollected FICA taxes after the end of the tax year, they cannot refund overcollected additional Medicare tax after the end of the year (Regs. Secs. 31.6413(a)-1(a)(2)(ii) and 31.6413(a)-2(a)(1)).

Special rules for employers that have not yet filed their final Form 941 for 2015

To use this special administrative procedure, employers must repay or reimburse their employees the overcollected FICA tax on the excess transit benefits for all four quarters of 2015 on or before filing the fourth-quarter Form 941. The employer, in reporting amounts on its fourth-quarter Form 941, may reduce the fourth-quarter “Wages, tips, and other compensation” reported on line 2, “Taxable social security wages” reported on line 5a, “Taxable Medicare wages & tips” reported on line 5c, and “Taxable wages & tips subject to Additional Medicare Tax withholding” reported on line 5d by the excess transit benefits for all four quarters of 2015. Employers who use this special administrative procedure will avoid having to file Forms 941-X, Adjusted Employer’s Quarterly Federal Tax Return or Claim for Refund, and Forms W-2c, Corrected Wage and Tax Statement.

Employers may correct only the employer share of FICA tax that corresponds to the employees’ share of FICA tax that has been repaid or reimbursed to the employees. Employers using this special procedure do not need to obtain written statements from each employee confirming that the employee did not make a claim (or if the employee did make a claim, that the claim was rejected) and will not make a claim for refund of FICA tax overcollected in a prior year, which is usually required when employers refund FICA tax to employees.

Employers that have not repaid or reimbursed some or all employees who received excess transit benefits in 2015 by the time they file their fourth-quarter Form 941 must use Form 941-X to make an adjustment or claim for refund for the excess transit benefits provided to those employees and must follow the normal procedures, which include obtaining a statement from employees.

Rule for employers that already filed final fourth-quarter Form 941 for 2015

Employers that already filed a final fourth-quarter Form 941 for 2015 must use Form 941-X to make an adjustment or claim a refund for any quarter in 2015 for the overpayment of tax on the excess transit benefits, after repaying or reimbursing the employees or, for refund claims, securing consents from employees.

Special instructions for Forms W-2

Those employers that have not yet furnished 2015 Forms W-2 to their employees should take into account the increased exclusion for transit benefits in calculating the amount of wages reported in box 1, “Wages, tips, other compensation,” box 3, “Social security wages,” and box 5, “Medicare wages and tips.” Employers that have already repaid or reimbursed their employees for the overcollected FICA taxes before furnishing Form W-2 should reduce the amounts of withheld tax reported in box 4, “Social security tax withheld,” and box 6, “Medicare tax withheld,” by those amounts. Employers, however, must report in box 2, “Federal income tax withheld,” the amount of income tax actually withheld during 2015. In addition, the amounts reported under box 6, “Medicare tax withheld,” will not be reduced by the additional Medicare tax. The employee will be able to apply this additional income tax and additional Medicare tax withholding against the employee’s taxes on Form 1040, U.S. Individual Income Tax Return, for 2015.

For those employers that repaid or reimbursed their employees for the overcollected FICA taxes after they furnished Forms W-2 to their employees, but before filing Forms W-2 with the Social Security Administration (SSA), the procedures require them to check the “Void” box at the top of each incorrect Form W-2 (Copy A), prepare new Forms W-2 with the correct information, and send these new Forms W-2 to the SSA. The employers should also furnish the employees new copies of Form W-2 marked “CORRECTED.” Employers that have already filed with the SSA their 2015 Forms W-2 must file Forms W-2c to reflect the increased exclusion for transit benefits.

—Sally P. Schreiber (sschreiber@aicpa.org) is a Tax Adviser senior editor.