IRS issues employer guidance on retroactive commuter tax break

The IRS recently issued guidance (Notice 2015-2) addressing an adjustment for potential overpayment of payroll taxes during 2014 related to employer-provided transit benefits under a qualified transportation fringe plan. This increase was included in the extenders legislation passed by Congress in mid-December. Specifically, the maximum excludable amount increased to $250 per participant per month, from $130 per participant per month, matching the maximum excludable amount already in place for parking expenses. This increase is retroactive to Jan. 1, 2014.

The retroactive change in the law affects employer plans that provided pretax and after-tax benefits in 2014. For example, if the employer’s 2014 plan was designed to provide up to $250 per month for mass transit/vanpooling benefits, the first $130 was on a pretax basis while the additional $120 was an after-tax benefit. In this situation, the employer now must follow the administrative procedures outlined in IRS Notice 2015-2 so the entire $250 per month can be reported as a pretax benefit. Employers should work with their payroll administrators and tax advisors to ensure 2014 W-2s and 2014 FICA/FUTA filings are prepared or amended accordingly.

This notice includes a simplified method for correcting FICA tax overpayments resulting from the higher 2014 limit and reporting the proper amounts of income and tax on Forms 941 and W-2. This guidance was needed since fourth-quarter Form 941 filings are due by Feb. 2, which is also the date by which Form W-2s must be provided to employees. The notice also addresses the circumstances for cash reimbursements for transit expenses when debit cards, smart cards, and other electronic media are used to provide qualified transportation plan benefits.

Employers who have already filed the Form 941 for the fourth quarter may not use this simplified procedure; in such a case, correction must be made using the Form 941-X and the usual procedures for overpayments.

  • Caution 1: If repayments or reimbursements are made to employees before the filing to the Social Security Administration, but after the issuance of Forms W-2, correction will have to be made utilizing the Form W-2c.
  • Caution 2: Salary reduction elections for 2014 cannot be retroactively increased, so this refund opportunity generally will affect only those employers that directly paid for transit and commuter highway vehicle transportation benefit from their own funds. That being said, we have seen some salary reduction agreements in qualified transportation fringe plans that have permitted employees to elect an amount above the former maximum pretax limit, treating any amount in excess of that limit as an after-tax election. Depending on the wording of these agreements, it is possible this retroactive increase of the transit pass/commuter highway vehicle limit could also provide tax relief to those employees who, during 2014, elected to contribute more than $130 per month to the plan. Employers that provided transit pass/commuter highway vehicle benefits in excess of $130 per month, but less than or equal to $250 per month in 2014, and who are seeking a refund of the employer’s portion of the over-withheld employment taxes, also have a duty to repay employees for their share of the over-withheld employment taxes.

Unfortunately, this increased benefit is short-lived. Employers and employees are once again in the same situation in 2015 since the adjustment only applies to calendar 2014. For calendar 2015, the monthly transit pretax benefit cap reverts to $130 unless there is further legislation.

For more information on this topic, or to learn how Baker Tilly tax specialists can help, contact our team.

The information provided here is of a general nature and is not intended to address the specific circumstances of any individual or entity. In specific circumstances, the services of a professional should be sought. Tax information, if any, contained in this communication was not intended or written to be used by any person for the purpose of avoiding penalties, nor should such information be construed as an opinion upon which any person may rely.  The intended recipients of this communication and any attachments are not subject to any limitation on the disclosure of the tax treatment or tax structure of any transaction or matter that is the subject of this communication and any attachments.