Transit Benefit Limit Retroactively Raised for 2014

Pretax transit benefit limit reverts back to $130/month for 2015, barring future action

By Stephen Miller, CEBS Dec 17, 2014
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updated 1/20/2015

President Barack Obama signed into law H.R. 5771, the Tax Increase Prevention Act of 2014, on Dec. 19, 2014. The legislation, passed by Congress earlier in December, will extend retroactively for one year (generally through the end of 2014) a number of tax relief provisions that expired either at the end of calendar year 2013 or during 2014, thus preventing tax increases when the tax year 2014 filing season begins early in 2015.

Mass Transit and Parking Benefits

Retroactive for 2014, the measure reinstates the maximum monthly exclusion amount for transit passes and van pool benefits (raising it from $130/month to $250/month) so that these transportation benefits match the $250/month exclusion for qualified parking benefits. These benefits are excluded from an employee’s wages for payroll tax purposes, and from gross income for income tax purposes. But beginning on Jan. 1, 2015, the transit limit will again fall to $130/month​ unless and until at some point Congress again addresses the issue.

2015

2014

Commuter highway vehicle and transit pass (transit benefits)

$130/month

$250/month (retroactive)

Qualified parking benefits

$250/month

$250/month


Employees can deduct commuting costs from their paychecks, tax free, through an employer benefit program up to the allowable monthly limit. Similarly, organizations that subsidize their employees' commuting costs may do so up to the allowable limit, which results in lower payroll taxes than if they paid the money in wages.

“The 11th hour agreement on a broader package of tax provisions would restore the subsidy to $250 per month, the same as the tax break given for parking benefits,” the website Government Executive reported after passage of the measure in the House. “The maximum monthly mass transit benefit dropped to $130 on Jan. 1 [2014] when a provision of the fiscal cliff deal expired. Congressional negotiators attempted to make the transit benefit and dozens of additional tax provisions permanent, but the proposal unraveled after President Obama threatened to veto the deal.”

Sen. Ron Wyden, D-Ore., who chairs the Senate Finance Committee, was unhappy with the one-year, retroactive deal, and with others had advocated on behalf of a multi-year deal, Government Executive reported.​

“The Society for Human Resource Management supports provisions that assist employers in offering a comprehensive, flexible benefits package, and transit parity [between commuting and parking benefit limits] would do just that,” said Kathleen Coulombe, senior advisor for government relations at SHRM.​

A January 2015 alert from Lockton Companies advised:

“Proposed tax legislation often includes language temporarily or permanently making the transit/commuter benefit limit equal to the parking benefit limit. We may see such legislation again in 2015. Still, employers are encouraged to use the unequal limits for 2015 (i.e., $250 for parking and $130 for transit/commuter benefits) to avoid potential administrative and compliance hassles that will arise if parity legislation is not passed for 2015.”

Favorable Tax Results for Money Already Spent

“Notably, because the legislation only retroactively reinstates the tax extenders for [2014], the rules all lapse again [at the end of 2014] and in 2015, once again, taxpayers will be waiting to find out if the tax extenders will again be reinstated and extended,” said financial planning advisor Michael Kitces in a blog post. “In addition, even with the retroactive fix for 2014, because many of these [business] tax preferences are actually tax credits or deductions that would apply for dollar amounts already expended earlier this year, they will simply provide more favorable tax results for actions that were already taken. In only a relatively limited number of situations … is there realistically enough time left in the year to actually be proactive in taking advantage of the tax extender legislation at all.”

Excessive FICA Contributions

“Employers may have to correct the taxable fringe benefits for employees who used post-tax dollars to pay for any mass transit benefits that were provided above the $130 monthly maximum,” advises an alert from Ryan, a tax services firm. “As this change is retroactive to Jan. 1, 2014, payroll amendments may be in order. Guidance from the Internal Revenue Service will soon follow [see box below], describing the mechanism by which the adjustments may be made.” Moreover, “Transit commuters who run all their commuting costs through their employer’s transit plan should get a retroactive true up—a potential $576 extra tax savings for 2014.”

Feb. 2 Adjustment Deadline

“It’s a good deal for employees, but the retroactive application will drive payroll managers crazy,” warned a January 2015 alert from Chimento & Webb P.C., adding that “An alleged ‘easier way’ just announced in IRS Notice 2015-2 is not that easy, and it only applies to companies that act fast prior to filing the last quarter’s Form 941 that is due on Feb. 2, 2015.”

Recent Transit Benefit Guidance

Retroactive 2014 pretax limit. On Jan. 8, 2015, the IRS released guidance (IRS Notice 2015-2) describing how employers and employees can take advantage of this retroactive increase. The IRS stated that salary reduction elections for 2014 cannot be retroactively increased, so employees of

employers that only provided transit/commuter benefits via pretax salary reduction are not likely able to reap any advantage from the adjustment.

The guidance also explains that employers that provided aggregate transit/commuter benefits in excess of $130 per month, and less than or equal to $250 per month in 2014, that are seeking a refund of the employer's portion of the over-withheld employment taxes have a duty to to repay employees for their share of over-withheld employment taxes.

Benefits provided via electronic media. IRS Revenue Ruling 2014-32, issued in November 2014, provided updated guidance on the use of electronic media (such as smartcards and debit cards) to distribute nontaxable transit benefits under section 132 of the tax code. The ruling modified and supersedes 2006 guidance on this subject, which many recent technological developments had rendered obsolete.

Employers making cash reimbursements where terminal-restricted debit cards are readily available must prepare to eliminate those reimbursements after 2015.

Buck Consultants also posted an analysis, IRS Updates Guidance on Transportation Fringe Benefits Provided Through Electronic Media.

Employee-owned vans. IRSInformation Letter 2014-0028, released in September 2014, addressed rules that apply when qualified transportation plans offer vanpooling benefits. Typically, employee-owned vehicles used for carpooling do not qualify as commuter highway vehicles because of the seating capacity and 80/50 rules, which state:

  • A commuter highway vehicle must seat six or more adults not including the driver.
  • At least 80 percent of the mileage use can reasonably be expected to be for transporting employees between their residences and places of employment.
  • On these trips the number of employees being transported is at least 50 percent of the vehicle’s adult seating capacity not including the driver.

However, qualified parking benefits may be available when these vehicles are used for commuting to work.

Other HR-Related Provisions

HR professionals should also take note of the following tax extensions provided in H.R. 5771:

  • Indian (Native American) employment tax credit. Extends the Indian employment tax credit, which provides a credit on the first $20,000 of qualified wages paid to each qualified employee who works on an Indian reservation.
  • Employer wage credit for activated military reservists. Extends the 20 percent employer wage credit (only available to employers with 50 or fewer employees) for employees called to active military duty.
  • Work Opportunity Tax Credit. Extends the provision that allows businesses to claim a work opportunity tax credit equal to 40 percent of the first $6,000 of wages paid to new hires of one of several targeted groups. These groups include members of families receiving benefits under the Temporary Assistance for Needy Families (TANF) program, qualified veterans (including those who are unemployed, disabled, or receiving TANF), qualified ex-felons, designated community residents, vocational rehabilitation referrals, qualified summer youth employees, eligible food and nutrition assistance recipients, qualified Social Security Income (SSI) recipients, and long-term family assistance recipients.

As with the increased transit benefit limit, all of the above tax extenders are set to expire at the end of 2014 and will not carry over into 2015. They will require Congressional attention if they are to be extended once again, or made permanent as part of comprehensive tax reform in the 114th Congress.

Multiemployer Pension Funding Relief

Earlier in December, Congress passed and the president signed into law H.R. 83, the Consolidated and Further Continuing Appropriations Act, which allows severely distressed multiemployer pensions to cut benefits to certain retirees. H.R. 5771 also includes provisions affecting multiemployer pension funding relief.

Specifically, the Pension Protection Act (PPA) of 2006 made a number of changes to multiemployer pension funding rules that would have expired on Dec. 31, 2014. Regarding these, H.R. 5771:

  • Extends the period to amortize funding shortfalls through 2015.
  • Extends the PPA’s rules for improving funding of multiemployer plans that fall into “endangered status” (generally less than 80 percent funded) or “critical status” (generally less than 65 percent funded) through 2015.

Stephen Miller, CEBS, is an online editor/manager for SHRM. Follow him on Twitter @SHRMsmiller.

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