On December 18, 2015, the President signed the Consolidated Appropriations Act, 2016 (CAA), which, among other changes to the Internal Revenue Code, permanently and retroactively restores parity by equalizing the limits for pre-tax parking and commuter benefits. In light of the CAA’s retroactive effect, the IRS released Notice 2016-06, which provides guidance for employers that provided transit benefits in excess of $130 per month on an after tax basis in 2015. The table below contains the adjusted limits for 2015 and 2016. Note that at least one state, Massachusetts, does not follow federal tax law in this regard and limits pre-tax mass transit benefits to $130 per month in 2016 for state tax purposes.
Prior to the enactment of the CAA, the pre-tax contribution limit for mass transit commuters in 2015 was $130 per month, while the limit for parking expenses was $250 per month.
The CAA retroactively increases the maximum pre-tax contribution limit for employees’ mass transit commuting expenses to the level permitted for parking expenses, i.e., $250 per month in 2015. If this sounds familiar, it is. Congress took similar action to retroactively increase benefits in 2014, and the IRS issued guidance on retroactive adjustments in early 2015. However, this time the CAA has made the increase permanent, which means that employers may allow employees to contribute up to $255 per month on a pre-tax basis for mass transit expenses or parking benefits without having to deal with any last-minute FICA adjustments while Congress ponders whether to extend parity each year.
That said, employers will have to address the CAA’s retroactive effect one last time if they provided transit benefits in excess of $130 per month in 2015. Employers must reduce the taxable wages of affected employees by the amount of transit benefits provided in excess of $130 per month, up to $250 (referred to as “excess transit benefits”).
Example: If an employer gave an employee a monthly transit pass worth $200 for the month of December 2015 and included $70 in the employee’s taxable wages for the month for withholding purposes, the employer must subtract that $70 from the employee’s taxable wages reported on Forms 941 and W-2.
Example: If an employer maintained a salary reduction plan and an employee purchased a $200 transit pass for the month of December 2015 by way of a pre-tax deduction of $130 and a post-tax deduction of $70, the $70 post-tax deduction must be treated as a pre-tax deduction for purposes of reporting the employee’s taxable wages on Forms 941 and W-2.
The following summarizes the procedures found in Notice 2016-06.
Special Procedure for Employers Adjusting Fourth Quarter Form 941
Employers that originally reported excess transit benefits as includible in gross income and wages and withheld income taxes and FICA taxes would normally be required to file Form 941-X for each quarter to make corrections. However, the IRS has provided a special procedure under which the employer must repay employees for the over-collected FICA tax (including any Additional Medicare Tax) on the excess transit benefits for all four quarters of 2015 upon or before filing the fourth quarter Form 941 (which is due at the end of January). By taking advantage of this special procedure, employers will avoid having to file Forms 941-X, and will also avoid having to file Forms W-2c as discussed below.
Note that this procedure can be used only to the extent that employers have repaid employees for the employee share of FICA tax (including any Additional Medicare Tax) attributable to the excess transit benefits. Under this special procedure, employers may correct the employer share of FICA tax only if the employees’ share of FICA tax has been repaid or reimbursed to the employees. Employers using this special procedure do not need to obtain written statements from their employees confirming, for each employee, 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 over-collected in a prior year.
Normal Procedure if Fourth Quarter Form 941 Already Filed or Employees Not Yet Repaid
Employers that have already filed the fourth quarter Form 941 must use Form 941-X and normal procedures to make an adjustment or claim a refund for any quarter in 2015 with regard to the overpayment of tax on the excess transit benefits after repaying or reimbursing their employees or, for claims for refund, securing consents from their employees. Similarly, to the extent employers have not repaid or reimbursed their employees who received excess transit benefits in 2015 prior to filing the fourth quarter Form 941, the employers must use Form 941-X to make an adjustment or claim for refund with respect to the excess transit benefits provided to those employees and must follow the normal procedures.
Employer Instructions for Form W-2
Employers that paid excess transit benefits in 2015 and have not furnished 2015 Forms W 2 to their employees must take into account the increased exclusion for 2015 transit benefits in calculating the amount of reportable wages (boxes 1, 3 and 5 of Form W-2). Employers that have repaid employees for the over-collected FICA taxes prior to furnishing Form W-2 must reduce the amounts of withheld tax reported in boxes 4 and 6 of Form W-2 by the amounts of the repayments. 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 Tax withheld on the excess transit benefits because no repayment of such amount is permitted after the end of 2015.
Employers that repaid employees for over-collected FICA taxes after furnishing Forms W-2 to their employees 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) and must prepare new Forms W-2 with the correct information, and send these new Forms W-2 (Copy A) to the SSA. The employers must write “CORRECTED” on the employees’ new copies (B, C, and 2) and furnish them to the employees.
Employers that have already filed 2015 Forms W-2 with SSA must file Forms W-2c, 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 the Forms W-2c to the employees.