Only a limited number of employees may benefit from federal legislation that retroactively extended parity between qualified parking and transit benefits, based on new IRS guidance. Notice 2015-2 instructs employers on applying a retroactive tax exclusion to commuters who used part of their 2014 salary to pay for mass transit commuting expenses or received a mass transit benefit from their employer during that year. But the IRS reminds employers that employees are not allowed to retroactively change their 2014 transit expense elections to take advantage of the retroactive raise in the exclusion limit. Only employers that provided ”excess transit benefits” (more on that term, below) and reported them as taxable wages — and which have not yet filed their fourth quarter Form 941 — can take advantage of a special tax refund process the IRS prescribed in the guidance. This process is similar to what the agency did in 2013 when Congress made a similar retroactive change to transit exclusion limits.
Employers that meet the criteria given in the guidance but that have already filed their fourth quarter Form 941, can also seek refunds but they must use Form 941-X. The guidance describes those requirements as well.
Background
Congress passed a bill with the tax benefit, called “transit parity,” in December 2014, which also happened to be the last month in which taxpayers could actually use the benefit. Retroactive to Jan. 1, 2014, the transit parity provision expired Dec. 31, 2014, days after the bill was signed by President Obama. Employers are now faced with the problem of how to apply a tax exclusion on a benefit they have been administering under terms that were suddenly made obsolete retroactively. Obama signed the bill on Dec. 19.
Excess Transit Benefit
This means a limited number of entities will benefit from the retroactive allowance — namely, companies with qualified transportation fringe benefits that provided an “excess transit benefit” during 2014. That term refers to any amount in mass transit benefits — either delivered to the employee through a compensation reduction agreement or funded by the employer — in excess of the $130 monthly limit that was in place as of Jan. 1, 2014, up to the new limit applied retroactively, which is $250 per month. Notice 2015-2 reminds employers that employees are not allowed to go back and change their elections in order to take advantage of the new retroactive limits. The guidance, which provides a special administrative procedure for certain employers to claim refunds of employment tax overpayments, only applies to employers that administered their QTFBs by allowing an excess transit benefit while including the excess amount as taxable wages.
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Excess Transit Benefit The term refers to any amount of transit benefit provided through a QTFB under Code Section 132(f) that exceeds the “old” limit and is no greater than the “new” limit. The “old” limit is $130 per month. That is the monthly exclusion limit that was in effect Jan. 1, 2014. Employers may have offered mass transit benefits in excess of the $130 monthly limit, in which case the excess amount (up to $250) is considered an “excess transit benefit”. Employers may have done so for a number of reasons, including because the $130 monthly limit does not reflect the actual mass transit costs for mass transit options in their region or out of speculation that the transit parity provisions in effect for 2012 and 2013 would be extended to 2014. The “new” limit for 2014 only, is $250 per month. That is the monthly exclusion limit that Congress passed in December 2014, to be retroactive to Jan. 1, 2014. Excess Transit Benefit = $130 to $250 in 2014. |
Employers that use the special administrative procedure under the Jan. 8 guidance, which is described beginning on page 5 of the Notice, must first refund their employees any excess FICA taxes (Social Security and Medicare, including any Additional Medicare Tax) and any excess federal income tax withholdings that are due them. Employers cannot refund or adjust federal income tax withholdings after Dec. 31, 2014.
A similar situation arose in 2013 when Congress enacted a transit parity provision that it applied to the tax year beginning Jan. 1, 2012. The only significant difference between the 2013 guidance (provided in Notice 2013-8) and the current guidance (Notice 2015-2) is that the current guidance addresses the Additional Medicare Tax, which first became effective in 2013 and therefore was not relevant for 2012.