At the end of 2014, Congress passed the Tax Increase Prevention Act of 2014 (2014 Tax Prevention Act) (P.L. 113-295), which extended numerous provisions for the 2014 tax year. One of these extensions provides parity for employer-provided mass transit and parking benefits under Code Sec. 132(f) through 2014.
In response, the IRS published guidance (Notice 2015-2) to clarify how employers should address the retroactive increase. The IRS also provided a special administrative procedure for employers to make adjustments on their Forms 941, Employer’s Quarterly Federal Tax Return, filed for the fourth quarter of 2014, and in filing Forms W-2, Wage and Tax Statement.
Before the 2014 Tax Prevention Act, the adjusted maximum monthly excludable amount for 2014 for the aggregate of transportation in a commuter highway vehicle and any transit pass was $130; and the adjusted maximum monthly excludable amount for qualified parking was $250. The 2014 Tax Prevention Act, however, retroactively enacted parity between the two amounts for the 2014 tax year. Therefore, the maximum monthly excludable amount for the period of January 1, 2014, through December 31, 2014, is $250 for transit passes and van pool benefits and also $250 for qualified parking. However, nothing in the 2014 Tax Prevention Act mandates that employers provide additional transit benefits to employees.
The IRS explained that, under the 2014 Tax Prevention Act, any transit benefits provided in 2014 by an employer to an employee in excess of $130 (capped at $250) is excluded from the employee’s gross income and wages. (The notice refers to this additional $120 as “excess transit benefits.”) The exclusion applies whether the employer provided the transit benefits out of its own funds or whether the transit benefits were provided through salary reduction arrangements.
The guidance clarifies, however, that employees may not retroactively increase their compensation reduction for 2014 to take advantage of the increase in the excludable amount for transit benefits in 2014. In addition, employees may not reduce their compensation by more than $130 per month in 2015 to make up for any permissible reimbursement of transit benefits incurred in 2014. The 2014 Tax Prevention Act‘s transit benefits parity provision applies to the 2014 tax year only.
Employers that treated “excess transit benefits” as taxable wages and that have not yet filed their fourth quarter Form 941 for 2014 (due February 2, 2015) should repay or reimburse their employees the over-collected FICA tax on the excess transit benefits for all four quarters of 2014, on or before filing the fourth quarter Form 941, the IRS explained.
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; and Medicare wages and tips reported on line 5c, by the excess transit benefits for all four quarters of 2014.
Employers that have filed the fourth quarter Form 941 must use normal procedures and must file Form 941-X, Adjusted Employer’s Federal Tax Return or Claim for Refund, to make an adjustment or claim a refund for any quarter in 2014, the IRS explained. Similarly, employers that, on or before filing the fourth quarter Form 941, did not repay or reimburse employees who received excess transit benefits in 2014 must use Form 941-X.
Employers that have not furnished 2014 Forms W-2 to their employees should take into account the increased exclusion for 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, the IRS explained. Employers that have already filed 2014 Forms W-2 should file Form W-2c, Corrected Wage and Tax Statement.