Procedure for employers to deal with retroactive increase in excludible 2015 transit benefits
Procedure for employers to deal with retroactive increase in excludible 2015 transit benefits
Notice 2016-6, 2016-4 IRB
In a Notice, IRS has provided guidance on how employers should handle the retroactive 2015 increase, by the Consolidated Appropriations Act, 2016 (the Act, P.L. 114-113), in the monthly exclusion for employer-provided transit and vanpooling benefits under Code Sec. 132(f)(2)(A) , from $130 to $250. IRS clarifies how the increase applies for 2015 and provides a special administrative procedure for employers to use in: (a) 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 (b) filing Forms W-2 (Wage and Tax Statement).
Background on transportation fringe benefits. Under pre-Act law, for 2015, an employee could exclude up to $250 a month of qualified parking and up to $130 a month for the sum of employer-provided transit and vanpooling benefits. (Code Sec. 132(f)(2), Notice 2015-2, 2015-4 IRB ; see Weekly Alert ¶ 32 01/15/2015) Amounts excluded from gross income under Code Sec. 132 are also excluded from Federal Insurance Contributions Act (FICA) taxes (both Social Security and Medicare, including the Additional Medicare Tax) and Federal income tax withholding. (Code Sec. 3121(a)(20), Code Sec. 3401(a)(19))
The Additional Medicare Tax is a 0.9% tax on taxpayers (other than corporations, estates, or trusts) receiving wages with respect to employment in excess of $200,000 ($250,000 for married couples filing jointly and $125,000 for married couples filing separately). (Code Sec. 3101(b)(2))
The Act extended parity between (a) employer-provided transit passes and vanpooling transportation fringe benefits, and (b) employer-provided parking benefits, retroactively beginning on Jan. 1, 2015. Thus, for any month in 2015, the monthly exclusion limitation for employer-provided transit and vanpooling benefits is the same as for employer-provided parking. (Code Sec. 132(f)(2), as amended by Act Sec. 103)
No amount is included in an employee’s gross income solely because he may choose to receive a qualified transportation fringe instead of compensation that would otherwise be includible in his gross income. (Code Sec. 132(f)(4)) This is often referred to as a “compensation reduction arrangement.” Reg. § 1.132-9(b) , Q&A 13 provides that, each month, the amount of the compensation reduction may not exceed the combined applicable statutory monthly limit for transportation in a vanpool and for transit passes.Reg. § 1.132-9(b) , Q&A 14(b) provides that the compensation reduction election must be made before the employee is able to receive the cash or other taxable amount at the employee’s discretion.
Background on correcting FICA overpayments. Under Reg. § 31.6413(a)-1(a) and Reg. § 31.6413(a)-2(b), before making an adjustment of an overpayment of FICA tax, an employer generally must repay or reimburse its employee in the amount of the overcollection prior to the expiration of the credit or refund limitations period. For FICA tax overcollected in a prior year (other than Additional Medicare Tax), an employer must also secure the employee’s written statement confirming that the employee hasn’t made any previous claims (or the claims were rejected) and will not make any future claims for refund or credit of the amount of the overcollected FICA tax.
Reg. § 31.6413(a)-1(a)(2)(ii) and Reg. § 31.6413(a)-2(a)(1) provide that withheld Additional Medicare Tax can only be repaid or reimbursed and subsequently adjusted during the same calendar year in which is it withheld. Similarly, Reg. § 31.6413(a)-1(b) provides that employers cannot adjust overpayments of withheld income tax after the end of the calendar year. Rather, the withheld Additional Medicare Tax and the withheld income tax are applied against the taxes shown on the employee’s individual income tax return (for example, Form 1040, U.S. Individual Income Tax Return), and any excess will be refunded to the employee.
Under Reg. § 31.6402(a)-2, an employer has a duty to assure that its employees’ rights to recover overcollected taxes are protected by repaying or reimbursing overcollected amounts. Alternatively, an employer may obtain the employee’s consent to the filing of the refund claim. Under Reg. § 31.6402(a)-2(a)(iii), no refund to the employer is permitted with regard to Additional Medicare Tax which the employer deducted or withheld from the employee. Similarly, under Code Sec. 6414 and Reg. § 31.6414-1, no refund to the employer is allowed for the overpayment of withheld income tax which the employer deducted or withheld from an employee.
To make employment tax corrections for overpayments (that is, to make adjustments or to claim refunds), an employer uses the “X” form that corresponds to the return being corrected. Thus, an employer corrects overreported taxes on a previously filed Form 941 by filing Form 941-X, Adjusted Employer’s Quarterly Federal Tax Return or Claim for Refund. A separate X form must be filed for each tax period.
New guidance. Notice 2016-6 provides that any “transit benefits” (i.e., the aggregate of the vanpooling and transit pass benefits) provided by an employer to an employee in excess of $130 (the former maximum monthly excludable amount) up to $250 (the amended maximum monthly excludable amount) are excluded from the employee’s gross income and wages. The exclusion applies to these excess amounts (excess transit benefits) whether the employer provided the transit benefits out of its own funds or whether the transit benefits were provided through compensation reduction arrangements.
Special administrative procedure. After considering the timing of the statutory change and the due dates for Form 941 for the fourth quarter of 2015 and Form W-2 (i.e., Feb. 1, 2016), and in order to reduce administrative burden, IRS has provided a special administrative procedure in Notice 2016-6 for employers that treated excess transit benefits as wages for 2015 and that haven’t yet filed their fourth quarter Form 941 for 2015. Employers taking advantage of this special administrative procedure avoid having to file Forms 941-X for each quarter to correct the error, and also avoid having to file Forms W-2c (Corrected Wage and Tax Statement).
Those who wish to use this special administrative procedure must repay or reimburse their employees the overcollected FICA tax (including Additional Medicare 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 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 and tips subject to Additional Medicare Tax withholding” reported on Line 5d, by the excess transit benefits for all four quarters of 2015.
The special procedure can only be used to the extent that employers have repaid or reimbursed their employees for the employee share of FICA tax (including Additional Medicare Tax) attributable to the excess transit benefits. Employers may only correct the employer share of FICA tax if the employees’ share of FICA tax has been repaid or reimbursed to the employees. Employers that use this special procedure don’t need to obtain written statements from their employees confirming for each employee that the employee didn’t make a claim (or if the employee did make a claim, the claim was rejected) and will not make a claim for refund of FICA tax overcollected in a prior year.
The repayment or reimbursement of overwithheld Social Security tax and the corresponding reduction for wages reported on Form 941, Line 5a, “Taxable social security wages,” 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 for 2015 ($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. The employer should reduce the last liability of the quarter reported (that 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. Note that negative numbers must not be entered on Line 14 or Schedule B.
Where fourth quarter Form 941 has been filed—”normal procedures.” 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. They may do so only after repaying or reimbursing the employees or, for refund claims, securing consents from its employees. Similarly, to the extent that employers haven’t repaid or reimbursed some or all employees who received excess transit benefits in 2015, on or before filing the fourth quarter Form 941, they must use Form 941-X to make an adjustment or refund claim with respect to the excess transit benefits provided to those employees and must follow the normal procedures.
Employers covered by these rules must obtain the employee statements under Reg. § 31.6413(a)-1 or Reg. § 31.6413(a)-2 (subject to the exception for making reasonable efforts). Furthermore, 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.
Form W-2. Employers that paid excess transit benefits and haven’t furnished 2015 Forms W-2 to their employees must 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 repaid or reimbursed their employees for the overcollected FICA taxes prior to furnishing Form W-2 (whether they utilized the special administrative procedure or the normal procedures) must reduce the amounts 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 Tax withheld on the excess transit benefits because no repayment or reimbursement of such amount is permitted after the end of 2015.
However, employers must in all cases report in Box 2, “Federal income tax withheld,” the amount of income tax actually withheld during 2015. The additional income tax withholding will be applied against the taxes shown on the employee’s individual income tax return (Form 1040, U.S. Individual Income Tax Return).
Employers that repaid or reimbursed their employees for the overcollected 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). The employer 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 will need to 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. Those employers must furnish copies of Form W-2c to the employees.
Transit benefits provided pursuant to compensation reduction agreements. Because of the above regs under Reg. § 1.132-9, employees may not retroactively increase their compensation reduction for 2015 to take advantage of the increase in the excludable amount for transit benefits in 2015. In addition, 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 benefits incurred in 2015.
References: For transportation fringe benefits, see FTC 2d/FIN ¶ H-2217 ; United States Tax Reporter ¶ 1324.08 ; TaxDesk ¶ 134,591 ; TG ¶ 7224 et seq.