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2016 tax-exclusion cap raised for mass-transit benefits; parity retroactive for 2015
updated on 1/12/2016
Guidance Issued on Retroactively Applying Higher Transit Cap for 2015
On Jan. 11, 2016, the IRS issued
Notice 2016-6 to provide guidance related to the Consolidated Appropriations Act signed into law on Dec. 18, 2015. Section 105 of the act amended Section 132(f)(2) of the Internal Revenue Code to permanently create parity between the transit benefit tax exclusion and the exclusion for qualified parking benefits.
a post by payroll firm ADP, under Notice 2016-6 employers and employees may not retroactively increase the monthly transit benefit for 2015 to take advantage of the increase in the excludable amount for transit benefits in 2015. However, if transit benefits were provided during 2015 in excess of $130 (up to $250), adjustments must be made to exclude the excess amount (up to $250 per month) from the employee’s income and wages on Form W-2.
Notice 2016-6 provides a special administrative procedure permitting employers to apply all related adjustments for 2015 to the fourth quarter 2015 Form 941, and in filing Forms W-2. Employers who originally reported excess transit benefits (amounts over $130 per month) as includable 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. However, Notice 2016-6 provides that employers that treated excess transit benefits as wages and had not yet filed their fourth quarter Form 941 for 2015 may apply all related adjustments for 2015 to the fourth quarter 2015 Form 941.
Long-sought equalization between tax breaks for employer-provided parking versus mass-transit benefits was enacted as part of an omnibus spending and tax bill that was signed into law on Dec. 18, 2015.
In 2015, the maximum monthly tax-exclusion for money that employers spent on public-transit passes and vanpool benefits for employees fell from $250 to $130, while the exclusion for qualified parking benefits remained at $250. Beginning in 2016, the monthly maximum tax exclusion for transit or parking benefits will each be $255, subject to an annual inflation adjustment.
The U.S. House of Representatives passed the
Protecting Americans from Tax Hikes (PATH) Act on Dec. 17. The Senate approved the measure on Dec. 18, folding it into the
Consolidated Appropriations Act, and President Barack Obama signed the omnibus bill into law that same day.
“Many of the provisions included in the PATH Act have been extended repeatedly over the past decade,” said Kathleen Coulombe, senior advisor for government relations at the Society for Human Resource Management (SHRM). “Employers will now gain certainty related to the tax treatment of several employer-sponsored benefits. Additionally, the bill provides employers with predictability and flexibility when offering a comprehensive benefits package to their employees—a key component in retaining and recruiting a skilled workforce.”
Parity for Transit Benefits
Organizations can subsidize their employees' commuting or parking costs with pretax dollars up to the allowable monthly limit, which results in lower payroll taxes than if they paid the money in wages. Alternatively, employees can pay for commuting or parking by having pretax dollars deducted from their paychecks through an employer benefit program, up to the allowable monthly limit.
Maximum Monthly Tax Exclusions
Commuter highway vehicle and public-transit pass
$130/month (retroactively raised to $250)
Qualified parking benefits
“SHRM supports provisions that assist employers in offering a comprehensive, flexible benefits package, and transit parity [between mass-transit and parking benefit limits] would do just that,” said Coulombe. Prior to the House and Senate votes, SHRM
sent a letter to all representatives and senators urging their support for the measure.
For some employers that allow workers to fund transit passes and parking with pretax dollars through a salary deferral program, the increase in the exclusion for transit benefits may have come after the close of open enrollment for 2016. Since their open enrollment selection for dollar deferrals was based on a monthly cap of $130 for transit benefits, these employees may want to increase the amount they selected to withhold each month. If they are not permitted to do so, they will have to wait until open enrollment for 2017 to take advantage of the higher cap.
Retroactive Increase for 2015
The new legislation also makes tax parity for mass-transit and parking benefits retroactive for 2015, in effect raising the tax-exclusion cap for mass-transit benefits to $250/month for that year. But in practice, for employees who fund their benefits with pretax dollars through a salary deferral program, retroactively contributing more than $130/month for 2015 could be administratively difficult.
[As noted in the update box above, the IRS subsequently held in
Notice 2016-6 that employers and employees may not retroactively increase the monthly transit benefit for 2015 to take advantage of the increase in the excludable amount for transit benefits in 2015, but if transit benefits were provided during 2015 in excess of $130 (up to $250), adjustments must be made to exclude the excess amount (up to $250 per month) from the employee’s income and wages on Form W-2.]
In December 2014, tax legislation was enacted,
retroactive for 2014, that reinstated the maximum monthly exclusion amount for transit passes and van pool benefits from $130/month to $250/month, so that these transportation benefits matched the $250/month exclusion for qualified parking benefits. However, under that measure, parity was allowed to expire at the end of 2014.
No Retroactive Cash Reimbursement If Transit Vouchers Available
In a Feb. 24, 2016, technical advice memorandum,
PMTA 2016-1, the IRS said employers can’t provide employees with cash reimbursements for 2015 transit benefit amounts that retroactively became nontaxable unless transit vouchers are unavailable and the reimbursements are provided under an accountable plan.
“If transit passes are readily available in the employer’s area, the [tax code] doesn’t provide an income or employment tax exclusion for transit benefits paid to employees in cash,” the IRS said. “If transit passes were not readily available in an area such that employers were permitted to provide transit benefits in the form of cash reimbursements, such benefits must be provided under a bona fide reimbursement arrangement for expenses actually incurred and substantiated by employees.”
Stephen Miller, CEBS, is an online editor/manager for SHRM.
Follow me on Twitter.
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