Part III - Administrative, Procedural, and Miscellaneous Application of Retroactive Increase in Excludable Transit Benefits

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Part III - Administrative, Procedural, and Miscellaneous

Application of Retroactive Increase in Excludable Transit Benefits

Notice 2015-2

PURPOSE

This notice provides guidance related to the enactment of section 103 of the Tax

Increase Prevention Act of 2014 (TIPA), Pub. L. 113-295, which increased the monthly

transit benefit exclusion under § 132(f)(2)(A) of the Internal Revenue Code from $130

per participating employee to $250 per participating employee for the period of January

1, 2014, through December 31, 2014. To address employers’ questions regarding the

retroactive application of the increased exclusion for 2014 and to reduce filing and

reporting burdens, the Internal Revenue Service (Service) is clarifying how the increase

applies for 2014 and providing 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 provided in all

quarters of 2014 and in filing Forms W-2, Wage and Tax Statement.

BACKGROUND

Section 132(a)(5) provides that any fringe benefit that is a qualified transportation

fringe is excluded from gross income. Section 132(f)(1) provides in relevant part that

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the term “qualified transportation fringe” includes (when provided by an employer to an

employee): (1) transportation in a commuter highway vehicle between home and work,

ms W-2, Wage and Tax Statement.

BACKGROUND

Section 132(a)(5) provides that any fringe benefit that is a qualified transportation

fringe is excluded from gross income. Section 132(f)(1) provides in relevant part that

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the term “qualified transportation fringe” includes (when provided by an employer to an

employee): (1) transportation in a commuter highway vehicle between home and work,

(2) any transit pass, or (3) qualified parking. Under § 132(f)(3), cash reimbursements by

employers for transit passes constitute a qualified transportation fringe only if a voucher

or similar item which may be exchanged only for a transit pass is not readily available

for direct distribution by the employer to the employee. Section 1.132-9(b) of the

Income Tax Regulations provides guidance on the exclusion for qualified transportation

fringes. See § 1.132-9(b) Q/A 16(b)(4) for the meaning of the term “readily available.”

See also Rev. Rul. 2014-32, 2014-50 I.R.B. 917, for guidance on the use of smartcards,

debit or credit cards, or other electronic media to provide qualified transportation fringe

benefits to employees.

Section 132(f)(2) provides that the amount of fringe benefits which is provided by

an employer to any employee and which may be excluded from gross income under §

132(a)(5) shall not exceed $100 per month in the case of the aggregate of

transportation in a commuter highway vehicle and any transit pass, and $175 in the

case of qualified parking. These amounts are adjusted annually for inflation under

§ 132(f)(6). Prior to enactment of TIPA, 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. See section 3.16 of Rev. Proc. 2013-35, 2013-47 I.R.B.

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. These amounts are adjusted annually for inflation under

§ 132(f)(6). Prior to enactment of TIPA, 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. See section 3.16 of Rev. Proc. 2013-35, 2013-47 I.R.B.

357. TIPA amended § 132(f)(2) to increase the maximum monthly excludable amount

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for the aggregate of employer-provided commuter highway vehicle transportation and

transit pass benefits to an amount equal to the maximum monthly excludable amount

for qualified parking. The amendment is effective retroactively beginning on January 1,

2014, and extends through December 31, 2014.

Amounts that are excluded from gross income under § 132 are also excluded

from Federal Insurance Contributions Act (FICA) taxes (social security and Medicare,

including Additional Medicare Tax) and Federal income tax withholding. Sections

3121(a)(20) and 3401(a)(19).

Generally, corrections of overpayments of FICA tax are made after an error has

been ascertained using the adjustment process under § 6413 or using the refund claim

process under § 6402. An error is ascertained when the employer has sufficient

knowledge of the error to be able to correct it.

Under §§ 31.6413(a)-1(a) and 31.6413(a)-2(b) of the Employment Tax

Regulations, before making an adjustment of an overpayment of FICA tax, an employer

generally must repay or reimburse its employee in the amount of the overcollection prior

to the expiration of the period of limitations on credit or refund, and, for FICA tax

overcollected in a prior year (other than Additional Medicare Tax), must also secure the

employee’s written statement confirming that the employee has not made any previous

claims (or the claims were rejected) and will not make any future claims for refund or

credit of the amount of the overcollected FICA tax

to the expiration of the period of limitations on credit or refund, and, for FICA tax

overcollected in a prior year (other than Additional Medicare Tax), must also secure the

employee’s written statement confirming that the employee has not made any previous

claims (or the claims were rejected) and will not make any future claims for refund or

credit of the amount of the overcollected FICA tax. An employer repays the employee

by direct payment to the employee; an employer reimburses an employee by applying

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the amount of the overcollection against the employee FICA tax which attaches to

wages paid by the employer to the employee. Sections 31.6413(a)-1(a)(2)(ii) and

31.6413(a)-2(a)(1) provide that withheld Additional Medicare Tax can only be repaid or

reimbursed and subsequently adjusted during the same calendar year in which is it

withheld. Similarly, § 31.6413(a)-1(b) provides that employers cannot adjust

overpayments of withheld income tax after the end of the calendar year. Rather, the

withheld Additional Medicare Tax and the withheld income tax are applied against the

taxes shown on the employee’s individual income tax return (for example, Form 1040,

U.S. Individual Income Tax Return) and any excess will be refunded to the employee.

Section 31.6402(a)-2 provides rules under which a refund claim for an

overpayment of FICA tax (other than Additional Medicare Tax) may be made. Pursuant

to § 31.6402(a)-2(a), an employer has a duty to assure that its employee’s rights to

recover overcollected taxes are protected by repaying or reimbursing overcollected

amounts. Alternatively, an employer may obtain the employee’s consent to the filing of

the refund claim. Under § 31.6402(a)-2(a)(iii), no refund to the employer is permitted

with regard to Additional Medicare Tax which the employer deducted or withheld from

the employee

to assure that its employee’s rights to

recover overcollected taxes are protected by repaying or reimbursing overcollected

amounts. Alternatively, an employer may obtain the employee’s consent to the filing of

the refund claim. Under § 31.6402(a)-2(a)(iii), no refund to the employer is permitted

with regard to Additional Medicare Tax which the employer deducted or withheld from

the employee. Similarly, under §§ 6414 and 31.6414-1, no refund to the employer is

allowed for the overpayment of withheld income tax which the employer deducted or

withheld from an employee.

To make employment tax corrections for overpayments (that is, to make

adjustments or to claim refunds), an employer uses the “X” form that corresponds to the

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return being corrected. Thus, an employer corrects overreported taxes on a previously

filed Form 941 by filing Form 941-X, Adjusted Employer’s QUARTERLY Federal Tax

Return or Claim for Refund. A separate X form must be filed for each taxable period.

APPLICATION OF RETROACTIVE INCREASE TO TRANSIT BENEFITS PROVIDED

IN 2014

For purposes of the remaining discussion, “transit benefits” refers to the

aggregate benefit of transportation in a commuter highway vehicle and transit passes

that meet the requirements of § 132 and the applicable regulations. Pursuant to the

change made by TIPA, which was retroactive to January 1, 2014, transit benefits

provided during 2014 by an employer to an employee in excess of $130 (the former

maximum monthly excludable amount) up to $250 (the amended maximum monthly

excludable amount) are excluded from the employee’s gross income and wages. These

excess amounts are referred to as “excess transit benefits” in this notice. The exclusion

applies whether the employer provided the transit benefits in 2014 out of its own funds

or whether the transit benefits were provided during 2014 through compensation

reduction arrangements as permitted by §§ 132(f)(4) and 1.132-9(b) Q/A 11-15

e excluded from the employee’s gross income and wages. These

excess amounts are referred to as “excess transit benefits” in this notice. The exclusion

applies whether the employer provided the transit benefits in 2014 out of its own funds

or whether the transit benefits were provided during 2014 through compensation

reduction arrangements as permitted by §§ 132(f)(4) and 1.132-9(b) Q/A 11-15.

Neither § 132 nor the change made by TIPA mandates that employers provide

additional transit benefits to their employees for 2014. With regard to transit benefits

provided pursuant to compensation reduction arrangements, §1.132-9(b) Q/A 13

provides that, each month, the amount of the compensation reduction may not exceed

the combined applicable statutory monthly limit for transportation in a commuter

highway vehicle and transit passes. Section 1.132-9(b) Q/A 14(b) provides that the

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compensation reduction election must be made before the employee is able to receive

the cash or other taxable amount at the employee’s discretion. Accordingly, 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

(the applicable statutory monthly limit for 2015) in order to receive any permissible

reimbursement for transit benefits incurred in 2014.

Furthermore, TIPA did not change the other requirements of § 132, including the

limitation on providing cash reimbursements for transit passes when transit passes are

readily available for direct distribution by the employer to the employee

month in 2015

(the applicable statutory monthly limit for 2015) in order to receive any permissible

reimbursement for transit benefits incurred in 2014.

Furthermore, TIPA did not change the other requirements of § 132, including the

limitation on providing cash reimbursements for transit passes when transit passes are

readily available for direct distribution by the employer to the employee.

SPECIAL ADMINISTRATIVE PROCEDURE FOR EMPLOYERS WHO DESIRE TO

MAKE ADJUSTMENTS FOR 2014 ON THE FORM 941 FILED FOR THE FOURTH

QUARTER OF 2014

Employers who originally reported excess transit benefits as includible in gross

income and wages and withheld income taxes and FICA taxes would normally be

required to file Form 941-X for each quarter to make corrections.

Due to the timing of the statutory change and the due dates for Forms 941 for the

fourth quarter of 2014 and Forms W-2, and in order to reduce administrative burden, the

Service is providing a special administrative procedure for employers that treated

excess transit benefits as wages and that have not yet filed their fourth quarter Form

941 for 2014. Employers who desire to use this special administrative procedure must

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repay or reimburse their employees for the overcollected FICA tax (including any

Additional Medicare Tax) on the excess transit benefits for all four quarters of 2014 on

or before filing the fourth quarter Form 941. 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, Taxable Medicare

wages and tips reported on line 5c, and Taxable wages & tips subject to Additional

Medicare Tax withholding reported on line 5d by the excess transit benefits for all four

quarters of 2014. By taking advantage of this special administrative procedure,

employers will avoid having to file Forms 941-X, and will also avoid having to file Forms

W-2c as discussed below

on line 5a, Taxable Medicare

wages and tips reported on line 5c, and Taxable wages & tips subject to Additional

Medicare Tax withholding reported on line 5d by the excess transit benefits for all four

quarters of 2014. By taking advantage of this special administrative procedure,

employers will avoid having to file Forms 941-X, and will also avoid having to file Forms

W-2c as discussed below.

This procedure can only be used to the extent that employers have repaid or

reimbursed their employees for the employee share of FICA tax (including any

Additional Medicare Tax) attributable to the excess transit benefits. Under this special

administrative procedure, employers may only correct the employer share of FICA tax if

the employees’ share of FICA tax has been repaid or reimbursed to the employees.

Employers using this special procedure do not need to obtain written statements from

their employees confirming, for each employee, that the employee did not make a claim

(or if the employee did make a claim, the claim was rejected) and will not make a claim

for refund of FICA tax overcollected in a prior year.

The repayment or reimbursement of overwithheld social security tax and the

corresponding reduction for wages reported on Form 941, line 5a, Taxable social

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security wages, must take into account that refunds or credits of social security tax are

limited to the amount paid on that portion of the excess transit benefits that, when

added to other wages for the year, did not exceed the social security wage base for

2014 ($117,000).

To ensure that use of this special administrative procedure does not result in a

mismatch between the total taxes reported on Form 941, line 10, Total taxes after

adjustments, and the Total liability for the quarter reported on Form 941, Line 14 (for a

monthly schedule depositor) or Schedule B (Form 941) (for a semiweekly schedule

depositor), an employer should use the following procedure

.

To ensure that use of this special administrative procedure does not result in a

mismatch between the total taxes reported on Form 941, line 10, Total taxes after

adjustments, and the Total liability for the quarter reported on Form 941, Line 14 (for a

monthly schedule depositor) or Schedule B (Form 941) (for a semiweekly schedule

depositor), an employer should use the following procedure. The employer should

reduce the last liability of the quarter reported (that is, Month 3 on line 14 or the last

liability entry on Schedule B) by the amount of the tax reduction due to use of the

special administrative procedure. If the amount of the tax reduction exceeds the last

liability of the quarter reported on line 14 or Schedule B, the employer should apply the

amount of the tax reduction to reduce previous liabilities in reverse order until the

amount of the tax reduction is completely used. Note that negative numbers must not

be entered on Line 14 or Schedule B.

The same procedures are available to filers of other employment tax returns

reporting FICA taxes (for example, the related Spanish-language return or return for

U.S. possessions) and to filers of employment tax returns reporting taxes under the

Railroad Retirement Tax Act.

NORMAL PROCEDURES FOR EMPLOYERS WHO HAVE FILED FOURTH QUARTER

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FORM 941 OR HAVE NOT REPAID OR REIMBURSED EMPLOYEES PRIOR TO

FILING FOURTH QUARTER FORM 941

Employers that have already filed the fourth quarter Form 941 must use Form

941-X and normal procedures to make an adjustment or claim a refund for any quarter

in 2014 with regard to the overpayment of tax on the excess transit benefits after

repaying or reimbursing the employees or, for claims for refund, securing consents from

their employees

PLOYEES PRIOR TO

FILING FOURTH QUARTER FORM 941

Employers that have already filed the fourth quarter Form 941 must use Form

941-X and normal procedures to make an adjustment or claim a refund for any quarter

in 2014 with regard to the overpayment of tax on the excess transit benefits after

repaying or reimbursing the employees or, for claims for refund, securing consents from

their employees. Similarly, to the extent employers have not repaid or reimbursed their

employees who received excess transit benefits in 2014 prior to filing the fourth quarter

Form 941, the employers must use Form 941-X to make an adjustment or claim for

refund with respect to the excess transit benefits provided to those employees and must

follow the normal procedures.

Under the normal procedures, the employer must obtain the required statements

under §§ 31.6413(a)-1 or 31.6402(a)-2 (subject to the exception for making reasonable

efforts). Furthermore, the employer may not repay or reimburse, make an adjustment

with respect to, or seek a refund of Additional Medicare Tax or income tax deducted or

withheld from the employee in 2014.

EMPLOYER INSTRUCTIONS FOR FORM W-2

Employers that paid excess transit benefits and have not furnished 2014 Forms

W-2 to their employees must 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.

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Employers that have repaid or reimbursed their employees for the overcollected FICA

taxes prior to furnishing Form W-2 (whether they utilized the special administrative

procedure or the normal procedures) must reduce the amounts of withheld tax reported

in box 4, Social security tax withheld, and box 6, Medicare tax withheld, by the amounts

of the repayments or reimbursements

and tips.

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Employers that have repaid or reimbursed their employees for the overcollected FICA

taxes prior to furnishing Form W-2 (whether they utilized the special administrative

procedure or the normal procedures) must reduce the amounts of withheld tax reported

in box 4, Social security tax withheld, and box 6, Medicare tax withheld, by the amounts

of the repayments or reimbursements. Note that under the normal procedures, the

amount reported in box 6, Medicare tax withheld, will not be reduced with regard to any

Additional Medicare Tax withheld on the excess transit benefits because no repayment

or reimbursement of such amount is permitted after the end of 2014.

In all cases, employers must report in box 2, Federal income tax withheld, the

amount of income tax actually withheld during 2014. The additional income tax

withholding will be applied against the taxes shown on the employee’s individual income

tax return (Form 1040, U.S. Individual Income Tax Return).

Employers that repaid or reimbursed their employees for the overcollected FICA

taxes after furnishing Forms W-2 to their employees but before filing Forms W-2 with

the Social Security Administration (SSA) must check the “Void” box at the top of each

incorrect Form W-2 (Copy A). The employer must prepare new Forms W-2 with the

correct information, and send these new Forms W-2 (Copy A) to the SSA. The

employers must write “CORRECTED” on the employees’ new copies (B, C, and 2) and

furnish them to the employees. See the 2014 General Instructions for Forms W-2 and

W-3.

Employers that have already filed 2014 Forms W-2 with SSA must file Forms W-

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2c, Corrected Wage and Tax Statement, to take into account the increased exclusion

for transit benefits and to reflect any repayments or reimbursements of the withheld

FICA tax and must furnish copies of Form W-2c to the employees.

DRAFTING INFORMATION

The principal author of this notice is Jean M

and

W-3.

Employers that have already filed 2014 Forms W-2 with SSA must file Forms W-

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2c, Corrected Wage and Tax Statement, to take into account the increased exclusion

for transit benefits and to reflect any repayments or reimbursements of the withheld

FICA tax and must furnish copies of Form W-2c to the employees.

DRAFTING INFORMATION

The principal author of this notice is Jean M. Casey of the Office of Division

Counsel/Associate Chief Counsel (Tax Exempt & Government Entities). For further

information regarding this notice contact Ms. Casey on (202) 317-4774 (not a toll-free

call).