IRS Addresses 2015 Increase in Transportation Benefits | Practical Law

IRS Addresses 2015 Increase in Transportation Benefits | Practical Law

The Internal Revenue Service (IRS) issued Notice 2016-6, which provides guidance on changes to transit benefit limits under the Consolidated Appropriations Act, 2016. The Act permanently extended the combined maximum monthly exclusion amount for transit passes and commuter highway vehicle transportation so that it matches the maximum monthly exclusion for qualified parking benefits under Section 132(f) of the Internal Revenue Code (Code). The Notice includes a special administrative procedure for employers to use in correcting FICA tax overpayments related to the Act.

IRS Addresses 2015 Increase in Transportation Benefits

Practical Law Legal Update w-001-3058 (Approx. 5 pages)

IRS Addresses 2015 Increase in Transportation Benefits

by Practical Law Employee Benefits & Executive Compensation
Published on 12 Jan 2016 • USA (National/Federal)
The Internal Revenue Service (IRS) issued Notice 2016-6, which provides guidance on changes to transit benefit limits under the Consolidated Appropriations Act, 2016. The Act permanently extended the combined maximum monthly exclusion amount for transit passes and commuter highway vehicle transportation so that it matches the maximum monthly exclusion for qualified parking benefits under Section 132(f) of the Internal Revenue Code (Code). The Notice includes a special administrative procedure for employers to use in correcting FICA tax overpayments related to the Act.
On January 11, 2016, the Internal Revenue Service (IRS) issued Notice 2016-6 (Notice) to provide guidance on transit benefit limits under the Consolidated Appropriations Act, 2016 (Act).
Enacted on December 18, 2015, the Act:
  • Retroactively increased the monthly transit benefit exclusion for the combined monthly exclusion amount for transit passes and commuter highway vehicle transportation from $130 to $250 per participating employee for the period between January 1, 2015 and December 31, 2015. For 2016, the monthly exclusion amount is $255.
  • Permanently extended the combined monthly exclusion limit for transit passes and commuter highway vehicle transportation to match the monthly limit for qualified parking benefits under Section 132(f) of the Internal Revenue Code (Code) (see Legal Update, Consolidated Appropriations Act of 2016 Postpones Cadillac Tax and Permanently Extends Transit Benefit Parity).
The exclusion applies whether transit benefits were provided in 2015 either:
  • By the employer from its own funds.
  • Through compensation reduction arrangements.
For a discussion of transit benefits, see Practice Note, Fringe Benefits under Code Section 132: Limits for Transit Pass/Commuter Highway Vehicles and Qualified Parking Benefits.
In implementing the Act, Notice 2016-6:
  • 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 2015 to reflect changes in the excludable amount for transit benefits for all of 2015.
  • 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 for 2015 to take advantage of the increased monthly transit benefits limit in 2015.
  • Reduce their compensation by more than $255 per month in 2016 to receive a reimbursement for transit expenses incurred in 2015.

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 make corrections by filing Form 941-X for each quarter in which the error occurred. However, Notice 2016-6 provides a special administrative procedure that employers may use if they:
  • Treated excess transit benefits as wages in 2015.
  • Have not yet filed Form 941 for the fourth quarter of 2015.
  • Repay or reimburse employees for any overcollected FICA tax for all four quarters of 2015 on or before filing the fourth quarter Form 941.
For this purpose, "excess transit benefits" are transit benefits (that is, transit passes and commuter highway vehicle benefits) provided by an employer during 2015 that are more than $130 (the pre-Act limit) up to $250 (the limit as amended).
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 2015 (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.

Normal Procedures for Employers to Correct Overwithholding

Employers that have already filed their fourth quarter Form 941 cannot use the Notice's special administrative procedure. Instead, they must use Form 941-X and the normal procedures for making an adjustment or claiming a refund for any quarter in 2015 regarding overpayment of tax on excess transit benefits, that is, after either:
  • Repaying or reimbursing employees.
  • Obtaining employee consents, for refund claims.

Employer Instructions for Form W-2

Notice 2016-6 also addresses how employers that paid taxes on excess transit benefits in 2015 should complete Forms W-2 for their employees:
  • Employers that have not furnished W-2s to their employees must account for the increased exclusion for 2015 transit benefits in calculating wages reported in:
  • Employers that repaid or reimbursed employees for overcollected FICA taxes before furnishing Form W-2s to their employees (whether using the special administrative procedure or the normal procedures) must reduce the amounts of withheld tax in specified boxes to reflect the repayment or reimbursement amounts.
  • Employers that repaid or reimbursed employees for overcollected FICA taxes after furnishing W-2s to their employees, but before filing W-2s 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 2015 Form W-2s with SSA must file Form 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

As with the special administrative procedure made available in response to the retroactive transit limit increase (see Legal Update, IRS Addresses 2014 Increase in Transit Benefit Limits under TIPA), Notice 2016-6 leaves little time for those employers that have not already filed Forms 941 and wish to take advantage of the procedure. However, because the Act makes the parity provision permanent, employers should not face these same correction issues at the end of 2016.