The Consolidated Appropriations Act of 2016 (the Act) retroactively increased the 2015 employer and employee Federal Insurance Contributions Act (FICA) and Federal Income Tax exclusion limit for transit benefits, from $130 per month to $250 per month. The Internal Revenue Service (IRS) issued Notice 2016-06 (Notice) providing correction procedures for employers who have provided benefits in excess of $130 per month in 2015 and wish to make corrections on their quarterly tax return (Form 941) for the fourth quarter of 2015. Because the Notice provides easier procedures for employers that have not yet filed the 2015 Forms W-2 or fourth quarter Form 941, employers should act quickly before those Forms are filed.
Section 105 of the Act amended Section 132(f)(2) of the Internal Revenue Code (Code) to create permanent parity, for periods after December 31, 2014, between the transit benefit exclusion for the aggregate of transportation in a commuter highway vehicle and any transit pass, and the exclusion for qualified parking. As a result of this amendment, the monthly transit benefit exclusion for the aggregate of transportation in a commuter highway vehicle and any transit pass increased from $130 per participating employee to $250 per participating employee for the period from January 1, 2015, through December 31, 2015. Due to indexing, for 2016, the monthly exclusion under both Code Section 132(f)(2)(A) (applicable to the aggregate of transportation in a commuter highway vehicle and any transit pass) and Code Section 132(f)(2)(B) (applicable to qualified parking) is $255.
In order to take advantage of the retroactive increase in transit benefits, an employer must have actually provided the benefits either directly or in response to an employee salary reduction meeting the requirements of Code Section 132(f). In addition, the benefits provided must have been more than $130 per month, and only the amount over $130 and up to $250 per month (Excess Transit Benefits) may be excluded.
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. To reduce filing and reporting burdens, the Notice clarifies how the increase applies for 2015 and provides a special administrative procedure for employers to use in filing (1) the 2015 fourth quarter Form 941 to reflect changes in the excludable amount for transit benefits provided in all quarters of 2015, and (2) 2015 W-2 wage and tax statement forms. These guidelines are similar to past guidelines addressing retroactive increases in transit benefits.
Special Procedures for Employers that Have Not Yet Filed Fourth Quarter Form 941 and Have Repaid or Reimbursed Employees Prior to Filing Fourth Quarter Form 941
In view of the timing of the statutory change and the due dates for Forms 941 for the fourth quarter of 2015 (fourth quarter Form 941) and 2015 Forms W-2, and in order to reduce administrative burden, the Notice provides a special administrative procedure for employers that treated Excess Transit Benefits as wages and that have not yet filed their fourth quarter Form 941 for 2015. Employers desiring to use this special administrative procedure must repay or reimburse their 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. 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. By taking advantage of this special administrative procedure, employers will avoid having to file Forms 941-X, and will also avoid having to file Forms W-2c, as discussed below.
The repayment or reimbursement of over-withheld 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 for an employee, did not exceed the social security wage base for 2015 ($118,500). Similarly, the repayment or reimbursement of over-withheld Additional Medicare Tax and the corresponding reduction for wages reported on Form 941, line 5d, Taxable wages and tips subject to Additional Medicare Tax withholding, must take into account the limit on refunds or credits of Additional Medicare Tax. Such refunds or credits are limited to the amount paid on that portion of the Excess Transit Benefits that, when subtracted from the total of the Excess Transit Benefits and other wages paid or provided to that employee for the year, leaves a balance of Medicare wages and tips equal to or greater than $200,000.
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 to Form 941 (for a semiweekly schedule depositor), an 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.
Normal Procedures for Employers that Have Filed Fourth Quarter Form 941 or Have Not Repaid or Reimbursed Employees Prior to Filing Fourth Quarter Form 941
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.
Under the normal procedures, the employer must obtain the employee statements required under Treasury Regulations §§ 31.6413(a)-1 or 31.6402(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.
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 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 over-collected 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.
In all cases, employers must 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 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). These employers must prepare new Forms W-2 with the correct information, and send the 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. See the 2015 General Instructions for Forms W-2 and W-3.
Employers that have already filed 2015 Forms W-2 with SSA must file Forms 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 the Forms W-2c to the employees.
Employers who have not yet filed their 2015 Forms W-2 or fourth quarter Form 941 should act now to take advantage of the special procedures set forth in the Notice. Employers who have already filed these Forms should follow the guidelines set forth in the Notice to make any corrections resulting from the increased transit benefit exclusion.