IRS Issues Employer Guidelines for Adjusting Retroactive Parity of 2015 Transit Benefits

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By Howard Perlman

Employers that need to adjust federal taxable wages because of the retroactive increase in nontaxable transit benefits for 2015 may use a special procedure in guidance released Jan. 11 by the Internal Revenue Service.

The guidance (Notice 2016-6) allows employers to use the 2015 fourth-quarter Form 941, Employer's Quarterly Federal Tax Return, to adjust for the retroactively increased amount of excludable transit benefits accumulated for all quarters of 2015. The guidance was similar to what the IRS issued a year ago in Notice 2015-2 for adjusting retroactively increased transit benefits for 2014.

The monthly increase to $250 from $130 for 2015 was part of the Consolidated Appropriations Act of 2016 (Pub. L. 114-113) signed Dec. 18 by President Barack Obama. The law established parity between transit and parking benefits. In 2016, the amount for each type of benefit is $255 a month.

Under the procedure, the retroactively nontaxable transit benefits for all quarters of 2015 would reduce reportable taxable amounts on the fourth-quarter Form 941, including wages, tips and compensation on line 2, Social Security wages on line 5a, Medicare wages and tips on line 5c and wages and tips subject to additional Medicare tax on line 5d, the notice said.

By using the procedure, employers can for 2015 avoid filing Form 941-X, Adjusted Employer's Quarterly Federal Tax Return or Claim for Refund.

Availability of the Special Adjustment Procedure

The special procedure is available to employers that have not yet filed the 2015 fourth-quarter Form 941, the notice said.

To use the procedure, employers must first repay the employee portions of Social Security and Medicare taxes that were withheld for the excess transit benefit amounts, the notice said. Employers also must reimburse qualifying employees for additional Medicare taxes on the excess benefits. Notice 2016-6 emphasized that if the procedure is being used, reimbursements of additional Medicare tax can be acquired for an employee only as long as the employee's total 2015 Medicare-taxable wages after the adjustments are at least $200,000.

Employers must reimburse the Federal Insurance Contribution Act tax amounts to employees before correcting the employer share of FICA taxes.

Those using this procedure do not need to obtain written statements from employees indicating that they did not and would not make independent claims for FICA tax refunds, the notice said.

Employers that already filed the fourth-quarter Form 941 for 2015 cannot use the special procedure and must file Forms 941-X for each quarter of 2015 to adjust for the retroactive increase in excludable amounts, the notice said.

Under standard regulations, before corrections are reported, employers must acquire employees' written affirmation that they will not independently seek FICA refunds on the retroactively nontaxable amounts. Refunds of additional Medicare tax are unavailable under standard regulations.