Affected employers must move quickly to take advantage of a special administrative procedure regarding a retroactive increase in excludable transit benefits enacted on December 19, 2014, under the Tax Increase Prevention Act of 2014 (TIPA). Because affected Internal Revenue Service (IRS) forms—Form 941 and Form W-2—have February 2 deadlines, the IRS issued Notice 2015-2 to explain (1) how the increase applies for 2014; (2) how certain employers can use a special administrative procedure to make Federal Insurance Contributions Act (FICA) tax adjustments for 2014; and (3) what employers need to consider in Form W-2 (and Form W-2(c)) reporting.
According to the notice, all employers that taxed transit and vanpooling benefits (collectively considered “mass transit benefits”), provided in 2014 in excess of the $130 monthly limit, must reduce the amount of taxable wages on Form W-2 or Form W-2(c) to reflect the increase in the 2014 mass transit benefit monthly limit. Eligible employers that choose to adjust their 2014 FICA tax payments in accordance with the special administrative procedures must act before filing their final Form 941 for the fourth quarter of 2014, which is due on February 2, 2015. Employers that have already filed their fourth quarter 2014 Forms 941, or that fail to take advantage of the special administrative procedure by February 2 for any reason, may adjust their FICA tax payments in accordance with the normal procedures for adjusting or claiming a refund for overpaid FICA taxes.
Notice 2015-2 provides information for employers that offered transit benefits in excess of $130, but less than $250 per month, that were subject to tax withholding (referred to as “excess transit benefits” in the notice). The notice does not provide guidance on excess transit benefits that employees may have paid themselves (that is, with their own moneys that were not reimbursed or not covered by a compensation reduction election).
FICA Refunds Only
Notice 2015-2 special adjustment procedures relate only to FICA taxes, including the Additional Medicare Tax. Employees may request a refund for overpaid income taxes—if any exist—when the employee files his or her personal income tax return, based on the assumption that the employer reduced the total wages (including the excess transit benefit the employee was previously taxed on) on Box 1 of the Form W-2.
An employer may, but is not required to, apply for an adjustment of FICA taxes, including the Additional Medicare Tax, paid by the employer and the employee portion of FICA taxes withheld by the employer in 2014 in accordance with the special adjustment procedure outlined in the notice, provided that the employer pays the affected employees the FICA taxes (including the Additional Medicare Tax) that were over withheld from their 2014 pay as a result of this increased tax exclusion. The “tax break” will reduce taxable income by up to $120 per month, which is the difference between the $130 previous limit and the $250 retroactive limit, plus any Additional Medicare Tax. The employer may not refund employees’ over withheld income taxes from 2014. The notice procedures relate only to FICA taxes, including the Additional Medicare Tax. If the employer does not pursue a FICA adjustment, employees may file Form 843 with the IRS to request refunds of the FICA taxes that were withheld from their pay.
Notice 2015-2 is similar, but not identical to the guidance offered by the IRS in 2013 when employers faced a similar situation following a retroactive increase in the transit limit for 2012. One key difference between the 2013 guidance and the current one is that Notice 2015-2 addresses the Additional Medicare Tax, which became effective in 2013 and was not relevant for 2012.
The notice states that employees may not retroactively change their compensation reduction elections for 2014 to take advantage of the increase in the excludable amount for transit benefits in 2014. “In addition,” the notice states, “employees may not reduce their compensation by more than $130 per month in 2015 (the applicable statutory monthly limit for 2015) in order to receive a reimbursement for transit benefits incurred in 2014.”
Background on the Retroactive Benefits Increase
The Tax Increase Prevention Act reestablished, for 2014 only, the parity that existed from 2010 to 2013 between mass transit and work-related parking benefits. In 2010 and 2011, employers were allowed to withhold up to $230 per month in pretax funds from employee pay —or provide up to the same amount in a tax-free subsidy to the employee—for mass transit commuting expenses or work-related parking expenses. In 2012, the transit benefit subsidy dropped to $125 (and the parking subsidy increased to $240).
In January 2013, the American Taxpayer Relief Act of 2012 retroactively increased the monthly limit for mass transit benefits for 2012 (up to $240 to match the limit for parking) and extended parity through December 31, 2013. In 2014, the transit benefit subsidy dropped to $130 and the parking subsidy increased to $250. In December 2014, the TIPA retroactively increased the monthly limit for mass transit commuting expenses for 2014 to $250, to match the 2014 limit for parking. For 2015, the monthly limit for mass transit benefits has dropped again to $130 and the monthly limit for work-related parking continues to be $250, as announced by the IRS in Rev. Proc. 2014-61.
February 2 Deadline for Special Adjustment Procedure
Employers that have not filed their final Form 941 for 2014, due on February 2, 2015, and that choose to adjust their 2014 FICA tax payments to reflect the retroactive increase in mass transit benefit limits for 2014, qualify for the special procedures outlined in the notice. Such employers may make adjustments for all of 2014 on their final Forms 941, provided that they repay affected employees the overwithheld employee portion of FICA tax that is attributable to the excess transit benefits on or before filing the Form 941. Unlike the normal procedure described below, employers must also refund any excess Additional Medicare Tax that was withheld.
Notably, employers repaying or reimbursing overwithheld Social Security tax 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, do not exceed the Social Security wage base for 2014: $117,000. Refer to the notice for line-by-line guidance on completing Form 941 and Schedule B.
Advantages of the Special Procedure
This special procedure offers two primary advantages:
- Employers are not required to obtain a written statement from employees and former employees attesting that the employee did not, and will not, file a refund claim for the FICA taxes, as is typically required.
- Employers avoid having to file Form 941-X for each quarter in 2014.
The special adjustment procedure also differs from the normal procedures that apply regarding the Additional Medicare Tax. Employers in this category also may choose to follow the normal procedures for adjusting FICA taxes, which are described below.
Employers That Filed Final 2014 Form 941—Normal Procedure
Employers that have already filed their final Forms 941 for 2014 and that want to adjust their 2014 FICA tax payments may not use the special adjustment procedure. Rather, those employers must use the normal procedures for adjusting or claiming a refund for overpaid FICA taxes.
Under the normal procedure, employers are required to
- file a Form 941-X for each quarter in 2014;
- obtain a written statement from affected employees, including former employees, certifying that an employee has not made any prior refund claims for the overwithheld FICA taxes and will not make any future claims for such taxes; and
- repay affected employees the overwithheld FICA taxes, but not Additional Medicare Tax or income tax.
Form 941-X need not be filed until the period of limitations for credits or refunds expires—that is, within three years of the date the original Form 941 was filed, or two years from the date the tax paid was reported on Form 941, whichever is later. Under the normal procedures, employers may not repay or reimburse, make an adjustment regarding, or seek a refund of Additional Medicare Tax or income tax deducted or withheld from the employee in 2014.
Form W-2 Reporting
According to the notice, all employers that taxed transit benefits provided in 2014 in excess of the $130 monthly limit must reduce the amount of taxable wages on Form W-2 or Form W-2(c), in boxes 1, 3, and 5, to reflect the retroactive increase in the 2014 mass transit benefit monthly limit. If the employer has repaid or reimbursed the employee for FICA taxes before furnishing the Form W-2, the employer should reduce the withholding amounts reported in boxes 4 and 6 (relating to Social Security and Medicare tax withholding) by the amount of the repayments or reimbursements.
It is important to note that under the normal procedures, the amount reported in box 6 will not be reduced by any Additional Medicare Tax withheld on the excess transit benefits because repayment or reimbursement of such amount is not permitted after the end of 2014. Employers must report the amount of income tax actually withheld in box 2 (related to income tax withholding) and should not change the amount reported in box 2 because income tax withholdings cannot be adjusted after the end of 2014. Refunds for overpaid income taxes may be obtained when the employee files his or her personal income tax return. Refer to the notice for additional Form W-2 guidance that is not described here.
Employers that treated excess transit benefits as income and wages for 2014 must move quickly if they have not yet filed Form 941 and want to take advantage of the special administrative procedure. Employers also may need to modify or correct their Form W-2s, as explained in the notice.