IRS Addresses 2014 Increase in Transit Benefit Limits under TIPA | Practical Law

IRS Addresses 2014 Increase in Transit Benefit Limits under TIPA | Practical Law

The Internal Revenue Service (IRS) issued Notice 2015-2, which provides guidance on the retroactive increase in the maximum monthly exclusion amount for transit passes and van pool benefits for 2014, which was part of the Tax Increase Prevention Act of 2014 (TIPA). The Notice includes a special administrative procedure for employers to use in filing their 2014 taxes that accounts for the revised monthly limit.

IRS Addresses 2014 Increase in Transit Benefit Limits under TIPA

Practical Law Legal Update 5-595-2685 (Approx. 4 pages)

IRS Addresses 2014 Increase in Transit Benefit Limits under TIPA

by Practical Law Employee Benefits & Executive Compensation
Published on 13 Jan 2015 • USA (National/Federal)
The Internal Revenue Service (IRS) issued Notice 2015-2, which provides guidance on the retroactive increase in the maximum monthly exclusion amount for transit passes and van pool benefits for 2014, which was part of the Tax Increase Prevention Act of 2014 (TIPA). The Notice includes a special administrative procedure for employers to use in filing their 2014 taxes that accounts for the revised monthly limit.
On January 8, 2015, the IRS issued Notice 2015-02 to implement a retroactive increase in the maximum monthly exclusion amount for certain transportation benefits under the Tax Increase Prevention Act of 2014 (TIPA) (I.R.S. Notice 2015-02, (Jan. 8, 2015)).
Enacted on December 19, 2014, TIPA retroactively increased the combined maximum monthly exclusion for transit passes and commuter highway vehicle benefits for 2014 from $130 to $250, so that the limit matches the limit for qualified parking benefits under Section 132(f) of the Internal Revenue Code (IRC) (see Legal Update, Tax Relief Extension Includes Provisions on Multiemployer Pension Plans, Transportation Benefits and PEOs and Practice Note, Fringe Benefits under IRC Section 132: Limits for Transit Pass/Commuter Highway Vehicles and Qualified Parking Benefits). TIPA does not affect the 2015 transit benefit limit ($130).
In implementing TIPA, Notice 2015-02:
  • Provides for a special administrative procedure for employers to use in filing Form 941 (Employer's Quarterly Federal Tax Return) for the fourth quarter of 2014 to reflect changes in the excludable amount for transit benefits for all of 2014.
  • Addresses the process for employers who are ineligible for the special administrative procedure.
  • Explains how employers must complete Form W-2 to account for excess transit benefits.
The Notice clarifies that employees may not:
  • Retroactively increase their compensation reduction elections for 2014 to take advantage of the increased monthly transit benefits limit in 2014.
  • Reduce their compensation by more than $130 per month in 2015 to receive a reimbursement for transit benefits incurred in 2014.

Special Administrative Procedure for Employers to Correct Overwithholding

Normally, an employer that reports excess transit benefits as includible in gross income and wages, and withholds income and FICA taxes, must file Form 941-X for each quarter in which the error occurred. However, Notice 2015-2 provides a special administrative procedure that employers may use if they:
  • Treated excess transit benefits as wages in 2014.
  • Have not yet filed Form 941 for the fourth quarter of 2014.
  • Repay or reimburse employees for the overcollected FICA tax for all four quarters of 2014 on or before filing the fourth quarter Form 941.
The special procedure allows an employer to make certain collective reductions on its fourth quarter Form 941 to reflect excess transit benefits for all four quarters of 2014 (for example, for wages, tips and compensation, and taxable social security wages).
Employers that use this special procedure need not:
  • File Form 941-X to correct overwithholding on transit benefits.
  • Obtain written statements from their employees confirming that each employee did not, and will not, make a claim for a refund of overcollected FICA taxes.
The repayment or reimbursement of overwithheld social security taxes and reduction in wages reported on Form 941 cannot result in total wages that exceed the 2014 social security wage base of $117,000.

Normal Procedures for Employers to Correct Overwithholding

Employers that have already filed the fourth quarter Form 941 cannot use the special administrative procedure outlined in the Notice. Instead, they must use Form 941-X and the normal procedures for making an adjustment or claiming a refund for any quarter in 2014 regarding overpayment of tax on excess transit benefits (that is, after repaying or reimbursing employees, or, for refund claims, obtaining employee consents).

Employer Instructions for Form W-2

Notice 2015-2 explains how employers that paid taxes on excess transit benefits in 2014 should complete Form W-2 for their employees:
  • Employers that have not furnished Form W-2s to their employees must account for the increased exclusion for transit benefits in calculating the amount of wages reported in:
    • Wages, tips, other compensation (Box 1);
    • Social Security wages (Box 3); and
    • Medicare wages and tips (Box 5).
  • Employers that repaid or reimbursed employees for the overcollected FICA taxes before furnishing Form W-2s (whether using the special administrative procedure or normal procedures) must reduce the amounts of withheld tax in specified boxes to reflect the repayment or reimbursement amounts.
  • Employers that repaid or reimbursed their employees for overcollected FICA taxes after furnishing Form W-2s to their employees, but before filing them with the Social Security Administration (SSA) must void the Form W-2s and prepare new Form W-2s with corrected information. The corrected Form W-2s must be sent to SSA and corrected copies must be provided to employees.
  • Employers that have already filed their 2014 Forms W-2 with SSA must file Forms W-2c (Corrected Wage and Tax Statement) to account for the increased exclusion for transit benefits and reflect any repayments or reimbursements of withheld FICA tax. A copy of the Form W-2c must also be provided to the employee.

Practical Impact

For employers that recall the IRS' guidance for implementing the 2012 transit benefit increase under the American Taxpayer Relief Act of 2012 (ATRA), the special procedure set out in Notice 2015-2 will seem very familiar (see Legal Update, IRS Procedure Permits Employers to Account for Retroactive Transit Benefit Increase). Once again, however, due to the timing involved, employers wishing to take advantage of this guidance will have little time to do so.