Guidance for Retroactive Transit Benefit Correction

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The IRS has provided guidance to employers that want to correct withholding taxes that were taken on post-tax contributions for Transit Benefits in 2015 prior to the announcement in late-December that the employer could provide up to $250 per month tax free to employees that elected in excess of the then pre-tax maximum of $130 per month.

In our earlier article, we wrote that under the Protecting Americans from Tax Hikes (PATH) Act the monthly pre-tax Transit and Parking Benefits available in an employer’s Transportation plan would be permanently equal; $255 for each in 2016. In addition, the Act made the Transit Benefit for 2015 retroactively equal to the Parking Benefit; $250 per month.

Through IRS Notice 2016-6, the IRS has provided corrective action guidance for employers that allowed post-tax deductions from their employees and/or for when employer funded transit expenses in excess of the $130 monthly pre-tax amount that was allowed prior to the passage of the Act. The corrective action applies to correction of an employee’s taxable compensation, the excess FICA taxes that were taken from an employee’s compensation and the FICA taxes paid by the employer on that compensation.

For example, an employee elected $200 for transit expenses each month of 2015, had a pre-tax deduction of $130 per month and a post-tax deduction of $70 per month and was provided a transit pass of $200 per month. The employee’s taxable wages included the $70 and the employer and employee paid FICA taxes on the $70 post tax deduction per month. The guidance applies to how the employer can correct the employee’s compensation and the FICA taxes that were paid on the $70 amount that now can be pre-tax.

The guidance does affect employers that did not provide for post-tax deductions or did not fund the excess benefit amount for Transit Benefits in their Transportation Plan.

Employers that allowed post-tax Transit Benefit deductions or funded excess Transit benefits in 2015 will want to seek advice from legal counsel, tax consultants and/or accountants on taking corrective action for the excess FICA taxes that were withheld from employees and/or for the FICA taxes the employer paid on those post-tax deductions or funding that exceeded $130 up to the parity maximum of $250 per month.

Categories: Benefits in General, Compliance | Tags: Transit , IRS | Return