On January 16, 2013, the Internal Revenue Service (IRS) issued Notice 2013-8 providing a special administrative procedure for employers with respect to 2012 transit benefits. Under Section 132(f) of the Internal Revenue Code of 1986, as amended (the Code), all “qualified transportation fringe” benefits are excluded from gross income, which includes employer-provided transportation in a commuter highway vehicle between home and work and transit passes (collectively, Qualified Transit Benefits) and qualified parking.
The American Taxpayer Relief Act of 2012 (ATRA) provides parity for the monthly excludable amount for Qualified Transit Benefits to the monthly excludable amount for qualified parking. Before the enactment of the ATRA, the amount of excludable transit fringe benefits was $125 per month for Qualified Transit Benefits and $240 for qualified parking. The ATRA retroactively increased the monthly transit benefit exclusion for Qualified Transit Benefits to $240 per participating employee for the 2012 calendar year (i.e., this provision is effective retroactively beginning January 1, 2012). The “qualified transportation fringe” benefit limit (for both Qualified Transit Benefits and qualified parking) increased to $245 for 2013.
Notice 2013-8 also addresses employers’ questions regarding the retroactive application of the increased exclusions, which can result in both decreased FICA and federal income tax liability. Employers acting promptly, in most cases by January 31, 2013, may have less administrative burden in obtaining a benefit for themselves and their employees with respect to the retroactive increase for Qualified Transit Benefits.
Employers that included excess Qualified Transit Benefits in gross income and wages, but have not yet filed their fourth quarter Form 941 (Employer’s Quarterly Federal Tax Return) for 2012 should do the following:
The above procedure will allow employers to avoid having to file Forms 941-X and possibly, Forms W-2c.
Employers that have already filed the fourth-quarter Form 941 must use Form 941-X to make an adjustment or claim a refund for any quarter in 2012 with regard to the overpayment of tax on the excess Qualified Transit Benefits after repaying or reimbursing the employees (or for refund claims, securing consents from its employees). Employers that have not repaid or reimbursed the employees who received excess Qualified Transit Benefits in 2012 on or before filing the fourth-quarter Form 941 must (i) use Form 941-X to make an adjustment or claim for refund with respect to the excess Qualified Transit Benefits provided to those employees and (ii) follow the normal procedures.
In all cases, employers must report in box 2 (federal income tax withheld) the amount of income tax actually withheld during 2012. The additional income tax withholding will be applied against the taxes shown on the employee’s individual income tax return (Form 1040, U.S. Individual Income Tax Return).
If you have any questions regarding Notice 2013-8 or any other relevant fringe benefits issues, please contact the Pepper Hamilton LLP attorney you generally work with, or one of the authors of this Alert.
Andrew J. Rudolph, Michael A. Kadlec and Randall I. Cherkas