On January 12, 2015, the IRS issued guidance in Notice 2016-06 giving employers a simplified process for making adjustments to 2015 wages and taxes pursuant to the retroactive increase in the monthly transit/van pool benefit from $130 to $250.

The notice also confirms that for 2016, the monthly limit for transit/van pool benefits is the same as parking at $255.

The 2015 administrative relief is available only to employers that take certain steps before the February 1, 2016 due date (or the extended due date of February 10) for filing the 2015 fourth quarter Form 941.

Employers that miss these key deadlines will be subject to the normal correction procedures which require obtaining the Social Security/Medicare (FICA) written consent letters from employees and the filing of Forms 941-X and Forms W-2c. (For more information on written consent letters see our special report.)

Using either the special rules or the normal procedure, employers must reflect any applicable reduction in wages on the 2015 Form W-2 (or Form W-2c) that is the result of the change in the monthly transit/van pool benefit amount. The IRS also expects that employers will refund to employees any related overpayment of Social Security and Medicare tax.

As previously explained (Tax Alert 2015-2413), under the Consolidated Appropriations Act of 2016 (Public Law 114-113)enacted on December 18, 2015 the 2015 monthly tax-free benefit for transit and commuter van pool benefits was increased from $130 to $250, in parity with the monthly benefit for parking benefits in Revenue Procedure 2014-61.

The provision is permanent; therefore, effective January 1, 2016, the monthly limit on transit/van pool benefits increases to $255, up from the $130 previously announced by the IRS. (Revenue Procedure 2015-53)

Special procedures

If you did not act to make corrections by December 31, 2015, but you make them by February 1, 2016 (or extended deadline of February 10):

1. Refund Social Security, Medicare and Additional Medicare tax to employees on excess transit benefits for all four quarters of 2015. You do not need to obtain written statements from employees confirming that they did not make a claim (or if the employee did make a claim, the claim was rejected) and will not make a claim for refund of FICA tax over collected in a prior year.

2. On the fourth quarter Form 941 (or equivalent, e.g., CT-1)

Pursuant to the total 2015 excess transit/van pool benefit:

— Reduce the fourth quarter wages, tips and compensation reported on line 2, taxable social security wages reported on line 5a, taxable Medicare wages and tips reported on line 5c, and taxable wages & tips subject to Additional Medicare Tax withholding reported on line 5d.

— Reduce the last liability of the 2015 fourth quarter reported (that is, month 3 on line 14 or the last liability entry on Schedule B) by the amount of the tax reduction due to using this special administrative procedure. If the amount of the tax reduction exceeds the last liability of the quarter reported on line 14 or Schedule B, apply the amount of the tax reduction to reduce previous liabilities in reverse order until the amount of the tax reduction is completely used.

Note that negative numbers must not be entered on Line 14 of Schedule B.

3. On 2015 Form W-2, show the correct amount of wages after the reduction for the excess transit benefit in boxes 1, 3 and 5. Show the correct amount of Social Security tax in Box 4, Medicare and Additional Medicare Tax in Box 6. Do not show any change in federal income tax in Box 2.

— If you already issued the incorrect Forms W-2 employees, but you have not yet filed them with the SSA, reissue a corrected Form W-2, write "corrected" on it, and give it to your employees. On the incorrect Form W-2, check the Box "void." Be certain the correct Forms W-2 are filed with the SSA.

— If you already filed Form W-2 with the SSA, prepare Forms W-2c, give the Forms W-2c to employees and file them with the SSA.

Normal correction procedures if you missed the February 1, 2016 (February 10 extended) Form 941 deadline:

1. Submit written FICA consent letters to affected employees for the refund due in 2015 on the excess transit/van pool benefit. A refund is allowed only for Social Security and Medicare tax. No refund of Additional Medicare tax is allowed.

2. You can either repay employees their overpaid FICA or obtain written consents to file the refund claim on their behalf. On 2015 Form W-2 show the correct amount of wages after the reduction for the excess transit/van pool benefit in Boxes 1, 3 and 5. Show the correct amount of Social Security tax in Box 4 and Medicare Tax in Box 6. Do not show any changes in Box 6 for the Additional Medicare Tax or in Box 2 for federal income tax.

— If you already issued the incorrect Forms W-2 to employees, but you have not yet filed them with the SSA, reissue a corrected Form W-2, write "corrected" on it, and give it to your employees. On the incorrect Form W-2, check the Box "void." Be certain the correct Forms W-2 are filed with the SSA.

— If you already filed Form W-2 with the SSA, prepare Forms W-2c. Give the Forms W-2c to employees and file them with the SSA.

3. Complete Form 941-X for each affected quarter in 2015 pursuant to the total 2015 excess transit benefit.

— Show the correction to wages on Lines 2, 5a and 5c. Note that on Line 5c, no adjustment may be shown for Additional Medicare tax.

— Following the Form 941-X instructions, claim a refund or abatement for the employer portion of FICA on the excess transit/van pool benefit and for the employee portion to the extent you have refunded the amounts to employees.

State taxation of transit benefits vary

Businesses should keep in mind that some states are not coupled with the federal Internal Revenue Code (IRC). Consequently, in some states the tax-free limit for transit/van pool benefits remains at $130 per month for 2015 and 2016.

Also of interest, some states have no monthly tax-free limit on certain transportation fringe benefits or limit qualified parking limits only to those connected with public transportation (i.e., park and ride).

For information concerning the latest state income tax rules governing transportation fringe benefits contact Debera Salam (debera.salam@ey.com or Kenneth Hausser (Kenneth.hausser.ey.com)

Ernst & Young LLP insights

The IRS has clarified that employers are not required to provide retroactive transit benefits to employees. If the employer provided benefits of only $130 per month throughout 2015, employees are due no additional employer-provided benefits.

Past December 31, 2015, employees are not allowed to make 2015 catch-up pretax contributions toward transit benefits. If they made transit pretax contributions of only $130 per month throughout 2015 and they made no after-tax contributions, wage adjustments and FICA tax refunds don't apply.

If employees made after-tax contributions in 2015, these may be reclassified as pretax contributions bringing the total monthly pretax contribution to $250. FICA refunds and wage adjustments would then be handled according to this IRS guidance.

Employees may not reduce their compensation by more than $130 per month in 2016 in order to receive any permissible reimbursement for transit benefits incurred in 2015.

If employees have unused balances in their transit benefit accounts as of December 31, 2015, consider if those balances may be applied toward 2016 transit expenses (up to $255 per month). Such reimbursements do not affect 2016 taxable wages since they were properly contributed in previous years.

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