On December 19, 2014, President Obama signed the Tax Increase Prevention Act of 2014 (“TIPA”), which in part retroactively increases the monthly limit for employer-provided transit benefits to $250 from $130 (the same excludable amount as monthly parking benefits). TIPA will impact employers that reimburse qualified transit benefits pre-tax up to the statutory limit or who provide qualified transit benefits without cost to the employee as a fringe benefit. However, TIPA applies only to 2014. Absent another bill bringing the level of excludable transit benefits into parity with parking benefits, the amount of excludable transit benefits will remain at $130 per month in 2015.
For employers with transit programs, TIPA means amounts paid or reimbursed for qualified transit benefits above $130 in 2014, up to $250 per month, are now being treated as non-taxable. This has two primary effects: (i) it reduces FICA taxes due, and (ii) requires employers to revise the Forms W-2 for affected employees. Please note that employees may not retroactively increase their monthly transit benefit elections for 2014 in response to the law change.
On January 8, 2015, the IRS issued Notice 2015-2, which provides answers on how employers should report the proper amount of wages and employment taxes on Forms 941 and W-2. The proper correction method your company must use depends on whether you have yet filed your Form 941 for the fourth quarter of 2014 and whether you have yet issued your Forms W-2 for 2014 to employees.
If you have not yet reported wages and taxes withheld on your fourth quarter Form 941 for 2014, you may take advantage of a special procedure permitted under Notice 2015-2 by (i) reimbursing your employees for the full amount of the employee share of FICA (including any additional Medicare tax) and (ii) reducing the amount reported in wages on the fourth quarter of Form 941 for 2014 by the amount of excess transit benefits for the entire 2014 calendar year. You will not be able to refund any excess income tax withheld as a result of TIPA during 2014. If this method is used, employers will not have to file Forms 941-X or W-2c.
If you have already submitted your fourth quarter Form 941 for 2014, you must use Form 941-X and normal procedures to claim a refund for each impacted quarter in 2014 in which wages were overstated and FICA taxes over-withheld prior to the enactment of TIPA. Income tax may not be recovered by this method, and unlike the special procedure permitted by Notice 2015-2, additional Medicare tax may also not be recovered via the Form 941-X. Any over-withheld additional Medicare tax and income tax will be reconciled when your employee files his or her individual taxes on Form 1040.
If you have not yet furnished Forms W-2 for 2014 to your employees, you are obligated to take into account the increased exclusion for transit benefits when reporting wages. If you have repaid or reimbursed the FICA tax over-collected during 2014, you must also report the proper amounts on the Forms W-2. If you have already issued Forms W-2 to employees reporting now-erroneous wage amounts, you must issue Forms W-2c to employees with the proper amounts.
Please feel free to contact us with any questions you may have regarding the operation of TIPA and its interaction with your tax reporting obligations for 2014 wages. The text of IRS Notice 2015-2 is available here.
Immediate Action Required for Employers that Provided Transit Benefits to Employees in 2014
January 15, 2015