IRS GuideWire: Application of Retroactive Increase in Excludable Transit Benefits

8 Jan

Notice 2015-02 provides guidance with respect to issues related to the retroactive increase in the monthly transit benefit exclusion under section 132(f)(2)(A) of the Internal Revenue Code from $130 per participating employee to $250 per participating employee for the period from January 1, 2014 through December 31, 2014. 

Notice 2015-02 will be published in Internal Revenue Bulletin 2015-4 on Jan. 26, 2015. Here’s the text in the meantime:

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 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. 357. TIPA amended § 132(f)(2) to increase the maximum monthly excludable amount 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. An employer repays the employee by direct payment to the employee; an employer reimburses an employee by applying 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. 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 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.

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