One of the changes made by the American Taxpayer Relief Act ("ATRA") was to restore the $240 monthly limit on employer-provided transit passes or commuting transportation, which had reverted to $125 as of January 1, 2012. The increase was made applicable both retroactively for 2012, and for 2013. (The excludible amount for 2013, which is indexed, has been announced at $245.)
The IRS has now issued Notice 2013-8 in order to provide guidance on how to deal with the issues presented by the retroactive application of the increase. Employers who provided transit benefits during 2012 in excess of $125 per month but not in excess of $240, and who treated the excess over $125 as taxable wages (which was correct), now find themselves, with the application of this retroactive change, possibly having withheld (and paid) too much FICA tax. (Extra income tax would also have been withheld, but that cannot be adjusted retroactively after year-end, so the Notice deals only with the FICA taxes. The income tax withholding will be resolved on the employees' 2012 tax returns, since they receive a credit for the "excess" withholding.)
Normally, overwithholding and overpayment of FICA taxes can be corrected by interest-free adjustment or by requesting a refund. Correction by adjustment requires (1) repaying or reimbursing the employees for the excess withholding, (2) obtaining a written statement from each employee confirming that he or she did not make a claim, and will not make a claim, for refund of the excess FICA withholding (or did make a claim that was rejected), and (3) filing an amended return (Form 941-X) for each quarter in which there was excess withholding. A refund claim is made by either repaying the employee for the overwithholding or obtaining the employee's written consent to file a refund claim on his or her behalf, and then filing a claim for refund of both employer and employee tax.
The Notice provides special administrative procedures that can be used in certain circumstances to more easily deal with the situation, in effect creating a simplified adjustment procedure.
Employers who have not yet filed their Form 941 for the fourth quarter of 2012 may correct by repaying or reimbursing employees the FICA tax withheld on the excess transit benefits for all four quarters of 2012 before filing the fourth quarter Form 941. Then, in reporting amounts on the fourth quarter Form 941, the employer should reduce the amounts reported as fourth quarter "wages, tips and compensation" (line 2), "taxable social security wages" (line 5a), and "Medicare wages and tips" (line 5c), by the total excess transit benefits for all four quarters of 2012. By taking advantage of this special administrative procedure, employers avoid having to either file Forms 941-X, or request a refund. They also do not need to obtain written statements from their employees confirming that the employee did not and will not make a claim or refund of those FICA taxes (or made a claim that was rejected).
Employers that have already filed their fourth quarter Forms 941 cannot follow the above procedure, but must use Form 941-X to make an adjustment or claim a refund for any quarter in 2012 after repaying or reimbursing the employees or (in the case of refund claims) obtaining consents from its employees. Similarly, whether or not they have filed the fourth quarter Form 941, employers that have not repaid or reimbursed some or all affected must use Form 941-X to make an adjustment or claim for refund and must follow the normal procedures.
Employers that have not yet furnished 2012 Forms W-2 to their employees should take into account the increased exclusion for transit benefits in reporting wages 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 prior to furnishing Forms W-2 should be sure to reduce the amounts of withheld Social Security tax reported in box 4, and Medicare tax reported in box 6. They should not, however, reduce the amount of Federal income tax withheld and reported in box 2.
Employers that repay or reimburse their employees for the overwithheld FICA taxes after furnishing Forms W-2 to the employees but before filing Forms W-2 with the Social Security Administration (SSA), should void the original W-2's, prepare new Forms W-2 with the corrected information for the SSA, and provide copies of the new Forms to the employees (with "CORRECTED" written across the top).
Employers that make adjustments after filing 2012 Forms W-2 with the SSA will have to file Forms W-2c to reflect the effects of the increased exclusion.
Note: In making any adjustments, employers should keep in mind that only the first $110,100 of an employee's "wages" was subject to the OASDI (old-age, survivor and disability insurance) portion of FICA in 2012 (4.2% employee tax and 6.2% employer tax), while all of an employee's wages were subject to the "Medicare" portion (1.45% for each). As a result, where an employee's wages (excluding any excess transit benefit) were at least $110,100, adjustments should be made only for the Medicare portion of the FICA tax. In addition, if the wages including excess transit benefit are more than $110,100, there should be an adjustment for the OASDI portion of the FICA tax only to the extent that the transit benefit caused the employee's wages to reach the $110,100 threshold.
If you have any questions regarding the Notice, please feel free to contact the author of this Alert, Jeffrey Ashendorf, at firstname.lastname@example.org, or any member of FordHarrison's Employee Benefits Practice Group. You may also contact the FordHarrison attorney with whom you usually work.