Prior to the enactment of the Tax Increase Prevention Act of 2014 (“TIPA”) in December 2014, effective for 2014, mass transit commuters were only able to contribute a maximum of $130 per month on a pre-tax basis toward their transit expenses (a reduction from $245 per month permitted in 2013). TIPA retroactively increased the maximum pre-tax contribution limit for employees’ mass transit commuting expenses to the level permitted for parking expenses, i.e., $250 per month, as provided under Code Section 132(f). However, this increased monthly cap expired again on December 31, 2014, so it is currently capped at $130 for 2015, unless Congress extends it further. If this sounds familiar, it is. Congress took similar action to retroactively increase benefits in 2012, and the IRS issued similar guidance on retroactive adjustments in early 2013.
Because the TIPA increase in the monthly cap on pre-tax contributions for mass transit commuter benefits is retroactive to January 1, 2014, employees can potentially recoup some of the taxes withheld on amounts paid for commuting expenses over the previous monthly cap of $130. On January 2, 2015, the IRS issued Notice 2015-2 providing guidance to employers regarding adjustments for “excess transit benefits” paid over the previous $130 monthly cap up to the new 2014 $250 monthly cap. However, withheld Additional Medicare Tax (new under the Affordable Care Act) can only be repaid or reimbursed (and then adjusted) during the same calendar year in which it was withheld under applicable rules. Accordingly, any withheld Additional Medicare Tax and income tax are applied against the taxes shown on the employee’s tax return, and the employee receives a refund from the IRS of any overpayment, unless the employer can use the special administrative procedure prescribed by the IRS in Notice 2015-2.
The special administrative procedure sets forth rules that an employer can follow to make adjustments if it has not yet filed its Form 941 for the fourth quarter of 2014, and repays employees any over-collected FICA tax (including the Additional Medicare Tax) on the excess transit benefits for all of 2014. If an employer has already filed its fourth quarter 2014 Form 941, it will have to follow the standard procedures for correcting the filing, including filing Form 941-X and obtaining a written statement from each affected employee that he or she has not, and will not, make a claim for a refund of FICA tax over-collected in the prior year, and may NOT repay any overpayment of Additional Medicare Tax. For more information on the special procedure and the standard procedure for adjustments, as well as making adjustments on employees’ Forms W-2, see Notice 2015-2.