January 15, 2016
On December 18, 2015, President Barack Obama signed a federal budget bill into law for 2016, that included several provisions impacting employee benefits, including a delay in implementing the Cadillac Tax and a moratorium on certain other fees under the Affordable Care Act (see our December 22, 2015 ACA Pathways). The budget bill also included a provision that increased the maximum monthly tax exclusion for employer-provided mass transit benefits in order to make it equal to the limit for employer-provided qualified parking benefits.
This increase provides permanent equivalence between mass transit and parking benefits, which is often referred to as "transit parity." The increase applies retroactively to January 1, 2015. Thus, the tax exclusion for mass transit benefits increases to $250 per month for 2015 (from $130 per month) and to $255 per month for 2016.
Transit parity is a welcome development for employers, especially those with employees who utilize public transit.
Employers that sponsor qualified transportation fringe benefit plans should consider the following:
Code Section 132(f) permits employers to provide certain transportation fringe benefits to employees on a pre-tax basis. These benefits include qualified parking, mass transit (commuter highway vehicle and transit passes) and bicycle commuting expenses. Employees typically pay for qualified parking and mass transit benefits through pre-tax payroll deductions.
There are maximum limits on each type of transportation fringe benefit. The 2016 budget bill increased the monthly tax exclusion for mass transit benefits, making it equal to the limit for qualified parking benefits, as reflected in the table below. These limits are subject to cost-of-living adjustments (if any) for future years, as announced by the IRS before the beginning of each calendar year.
|Maximum Monthly Limits|
|Type of Benefit||2015||2016|
|Mass transit (commuter highway vehicle and transit pass)||$130 (retroactively raised to $250 by the 2016 budget law)||$255|
|Bicycle commuting||The applicable annual limitation for any qualified bicycle commuting reimbursement is the product of $20 multiplied by the number of qualified bicycle commuting months during a calendar year. This limit is not subject to cost-of-living adjustments, which means it does not change from year to year.|
On January 11, 2016, the IRS issued Notice 2016-6 to provide guidance on how the tax limit increase applies for 2015 and a special administrative procedure to reduce filing and reporting burdens. Notice 2016-6 confirms that:
According to Notice 2016-6, employers must reduce the taxable wages of affected employees for 2015, as reported on Forms 941 and W-2 and any equivalent forms, by the amount of any "excess transit benefits". "Excess transit benefits" are transit benefits provided during 2015 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).
Example: If an employer maintains a transportation fringe benefit plan and an employee purchased a $200 transit pass for the month of December 2015 by way of a pre-tax deduction of $130 and a post-tax deduction of $70, the $70 post-tax deduction must be treated as a pre-tax deduction for purposes of reporting the employee's taxable wages on Forms 941 and W-2.
Employers that 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. The IRS, however, has provided a special administrative procedure for employers that treated excess transit benefits as wages and that have not filed their fourth quarter Form 941 for 2015. This special procedure allows employers to use their fourth quarter Form 941 to reflect changes in the excludable amount for transit benefits provided in all quarters of 2015. Employers that want to use this special administrative procedure must repay or reimburse their employees for the over-collected FICA tax (including any Additional Medicare Tax) on the excess transit benefits for all four quarters of 2015 upon or before filing the 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 2015 with regard to the overpayment of tax on the excess transit benefits after repaying or reimbursing their employees or, for claims for refund, securing consents from their employees. Similarly, if an employer has not repaid or reimbursed its employees who received excess transit benefits in 2015 prior to filing the fourth quarter Form 941, the employer 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.
Notice 2016-6 provides instructions for completing Forms W-2 for employers that paid excess transit benefits in 2015. Employers that paid excess transit benefits in 2015 and have not furnished 2015 Forms W-2 to their employees must take into account the increased exclusion for 2015 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).
Employers that have repaid or reimbursed their employees for the over-collected FICA taxes prior to furnishing Form W-2 (whether they used 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.
Employers that have already filed 2015 Forms W-2 with Social Security Administration (SSA) must file Forms W-2c 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 the Forms W-2c to employees.
IRS Notice 2016-6 is available at https://www.irs.gov/pub/irs-drop/n-16-06.pdf.
For additional information, please contact your Burnham Benefits Consultant or Burnham Benefits at 949-833-2983 or firstname.lastname@example.org.
Burnham Benefits does not engage in the practice of law and this publication should not be construed as the providing of legal advice or a legal opinion of any kind. The consulting advice we provide is intended solely to assist in assessing its compliance with the Patient Protection and Affordable Care Act and other applicable federal and state law requirements, and is based on Burnham Benefit’s interpretation of federal guidance in effect as of the date of this publication. To the best of our knowledge, the information provided herein, and assumptions relied on, are reasonable and accurate as of the date of this publication. Furthermore, to ensure compliance with IRS Circular 230, any tax advice contained in this publication is not intended to be used, and cannot be used, for purposes of (i) avoiding penalties imposed under the United States Internal Revenue Code or (ii) promoting, marketing or recommending to another person any tax-related matter.