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IRS Procedure Permits Employers to Account for Retroactive Transit Benefit Increase
Practical Law Legal Update 2-523-5950 (Approx. 4 pages)
IRS Procedure Permits Employers to Account for Retroactive Transit Benefit Increase
by PLC Employee Benefits & Executive Compensation
| Published on 17 Jan 2013 • USA (National/Federal) |
The Internal Revenue Service (IRS) has issued Notice 2013-8, which provides a special administrative procedure for employers to use in adjusting 2012 gross income and wages, and withheld income and Federal Insurance Contributions Act (FICA) taxes, for a retroactive increase in employees' monthly transit benefit exclusion.
On January 16, 2013, the IRS issued Notice 2013-8, which provides guidance to employers relating to the retroactive increase in the maximum monthly excludable amount for employer-provided transit pass benefits and commuter highway vehicle transportation adopted as part of the American Taxpayer Relief Act of 2012 (ATRA) (see Legal Update: Fiscal Cliff Deal Includes Employee Benefits Provisions). Specifically, the guidance provides:
- A special administrative procedure for employers to use in making adjustments to reflect changes in the excludable amount for transit benefits provided in 2012.
- Instructions to employers for preparing 2012 Form W-2s that reflect the increased exclusion.
Background
Under ATRA, IRC Section 132(f)(2) was amended to increase the maximum monthly excludable amount for employer-provided commuter highway vehicle transportation and transit pass benefits from $125 to $240. The amendment is effective retroactively, beginning on January 1, 2012 and extending through December 31, 2013. (Under IRS Revenue Procedure 2013-15, however, the maximum excludable amount for 2013 is $245.) Amounts excluded from gross income under IRC Section 132 are also excluded from Federal Insurance Contributions Act (FICA) taxes (both Social Security and Medicare) and federal income tax withholding.
Special Administrative Procedure
Employers that initially reported excess transit benefits (that is, amounts greater than the old limit of $125 and up to $240) as includible income, and withheld income and FICA taxes, would normally be required to file Form 941-X for each quarter to correct the error. However, the guidance provides a special administrative procedure under which employers may account for the limit increase for all four quarters of 2012 on their Form 941 for the fourth quarter of 2012. To take advantage of this procedure, employers must:
- Repay or reimburse employees the overcollected FICA taxes on excess transit benefits for all four quarters of 2012 on or before filing the fourth quarter Form 941.
- Not have already filed their fourth quarter Form 941 for 2012. (Employers that have already filed the fourth quarter Form 941 must use Form 941-X to make adjustments or claim refunds.)
In calculating amounts on the fourth quarter Form 941, an employer may reduce employees' fourth quarter wages and Social Security and Medicare wages by the excess transit benefits for all four quarters of 2012.
Employers that use this procedure can avoid having to file both separate Form 941-Xs for each quarter of 2012 and Forms W-2c ("Corrected Wage and Tax Statement").
Form W-2s
Additionally, with regard to Form W-2 reporting, employers who have:
- Not yet provided 2012 Form W-2s to their employees should account for the increased transit benefit exclusion in calculating Box 1 wages, and Social Security and Medicare wages, on the Form W-2s.
- Repaid or reimbursed employees for overcollected FICA taxes after providing Form W-2s to their employees, but before filing Form W-2s with the Social Security Administration (SSA), should:
- check the "Void" box at the top of each incorrect Form W-2;
- prepare new Form W-2s with the correct information and send the new forms to SSA; and
- write "CORRECTED" on the employees' new copies and provide them to employees.
- Already filed Form W-2s with the SSA must file Form W-2cs to account for the increased transit benefits.
Practical Impact
Although Notice 2013-8 offers guidance on reporting questions that were unclear after ATRA, employers who are eligible and wish to take full advantage of the Notice's special administrative procedure will need to act quickly to do so.