On January 16 the Internal Revenue Service (IRS) issued guidance on the application of the retroactive increase in excludible transit benefits, as enacted under the American Taxpayer Relief Act of 2012 (ATRA). IRS Notice 2013-08 clarifies how the increase applies for 2012, provides a special administrative procedure for certain employers who desire to make adjustments for 2012, and advises on Form W-2 (and Form W-2(c)) reporting. Eligible employers who desire to adjust their 2012 FICA tax payments in accordance with the special administrative procedures must act before filing their final Form 941 for 2012 (due January 31, 2013).
ATRA re-established, for 2012 and 2013 only, the parity that existed in prior years between mass transit and work-related parking benefits. In 2010 and 2011, employers were allowed to withhold up to $230 a month in pretax funds from employee pay (or provide up to the same amount in a tax-free subsidy to the employee) for mass transit commuting expenses or work-related parking expenses. In 2012, the transit benefit subsidy dropped to $125 (and the parking subsidy increased to $240). ATRA retroactively increases the monthly limit for mass transit commuting expenses for 2012 (up to $240) and extends parity through Dec. 31, 2013. The monthly limit for both mass transit and work-related parking for 2013 is $245 (as announced by the IRS in Rev. Proc. 2013-15).
As a result of this retroactive change in the 2012 limits, employers may, but are not required, to treat transit benefits provided in 2012 in excess of $125 (up to $240) per month as non-taxable (referred to by the IRS as an “excess transit benefit” in the notice). If an employer decides to treat excess transit benefits as nontaxable to employees, the employer will be eligible for a refund of the Federal Insurance Contributions Act (FICA) taxes it paid on excess transit benefits provided that the employer repays to employees the FICA taxes that, as a result of this increased tax exclusion, were over-withheld from 2012 pay, as described below.
The notice provides information for employers that offer transit benefits in excess of $125 but less than $240 per month that were subject to tax withholding. The notice does not provide guidance on excess transit benefits that employees may have paid themselves (i.e., with their own moneys that were not reimbursed or otherwise processed through the employer’s payroll and subjected to tax withholding.) An IRS spokesperson stated that the IRS is still considering whether an employer can retroactively provide increased benefits for 2012 (for example, if the employer only provided transit benefits up to $125 per month in 2012).
January 31 Deadline for Special Adjustment Procedure
Employers who have not filed their final Form 941 for 2012 (due January 31, 2013) who desire to adjust their 2012 FICA tax payments to reflect the retroactive increase in mass transit benefit limits for 2012 qualify for the special procedures outlined in the notice. Such employers may make adjustments for all of 2012 on their final Form 941 provided that the employer repays affected employees the over-withheld employee portion of FICA tax that is attributable to the excess transit benefits on or before filing the Form 941. Under this special procedure, the employer is not required to obtain a written statement from employees (and former employees) attesting that the employee did not, and will not, file a refund claim for the FICA taxes (which is typically required) or Form 941-Xs for any quarters in 2012. Employers in this category may also choose to follow the normal procedures for adjusting FICA taxes, described below.
Employers That Filed Final 2012 Form 941
Employers who have filed their final Form 941 for 2012 who desire to adjust their 2012 FICA tax payments are required to follow the normal procedures for adjusting or claiming a refund for overpaid FICA taxes. Under those procedures, employers are required to file a Form 941-X for each quarter in 2012, obtain a written statement from affected employees (including former employees) that the employee has not made any prior, and will not make any future, refund claims for the over-withheld FICA taxes, and repay affected employees the over-withheld FICA taxes. Form 941-X need not be filed until the period of limitations for credits or refunds expires, i.e., within three years of the date the original Form 941 was filed or two years from the date the tax paid was reported on Form 941, whichever is later.
Form W-2 Reporting
The notice states that employers should take into account the increased tax exclusion on the employee’s 2012 Form W-2 (if not furnished yet) or 2012 Form W-2(c) (if furnished). If the employer has repaid or reimbursed the employee for FICA prior to furnishing the Form W-2, the employer should reduce the withholding amounts reported in boxes 4 and 6 (relating to Social Security and Medicare tax withholding). Employers must report the amount of income tax actually withheld in box 2 (related to income tax withholding), and should not change the amount reported in box 2 because income tax withholdings cannot be adjusted after year-end. For that reason, the adjustment procedures only relate to FICA taxes. Refunds for overpaid income taxes may be obtained when the employee files their personal income tax return. Refer to the notice for additional Form W-2 guidance, not described here.
An IRS spokesperson stated that no extensions to the Form 941 and Form W-2 deadlines are contemplated.
Notice 2013-8 is scheduled to be published in Internal Revenue Bulletin 2013-7, dated February 11, 2013.
Vicki M. Nielsen is Of Counsel with the Washington, D.C. office of Ogletree Deakins.