Section 132(a)(5) of the Internal Revenue Code provides that any fringe benefit that is a qualified transportation fringe is excluded from gross income for federal income tax purposes, and the FICA rules allow for the same exclusion. The term “qualified transportation fringe” includes (when provided by an employer to an employee) transportation in a commuter highway vehicle between home and work and any transit pass (Transit Benefits), or qualified parking. Prior to the enactment of the American Taxpayer Relief Act (ATRA), the 2012 monthly limit for qualified parking was $240, and the monthly limit for other Transit Benefits was $125. ATRA amended Section 132(f)(2) to increase the maximum monthly excludable amount for Transit Benefits to an amount equal to the maximum monthly excludable amount for qualified parking (i.e., $240), effective retroactively beginning on January 1, 2012.
As a result of ATRA, employers that provided Transit Benefits in excess of the pre-ATRA maximum monthly excludable amount may be able to obtain a refund of FICA amounts paid on such benefits. Generally, corrections of overpayments of FICA tax are made when an error has been ascertained using either the adjustment process or using the refund claim process, and requires a Form 941-X to be filed for each quarter in which excess FICA taxes were reported. (Correction of over-withheld federal income tax can not be made until after the year-end in which the over-withholding occurred.)
IRS Notice 2013-8 provides a special administrative process to obtain a refund for excess FICA tax paid as a result of the retroactive amendment on the monthly excludable limit for Transit Benefits. To benefit from the retroactive increase in the excludable limits for Transit Benefits, the employer must have actually paid amounts for Transit Benefits in excess of the limit either from its own resources or from employee salary deferrals.
Employers that have not yet filed their fourth quarter Form 941 for 2012 must repay or reimburse their employees the over-collected FICA tax on the excess transit benefits for all four quarters of 2012 on or before filing the fourth quarter Form 941. The employer, in reporting amounts on its fourth quarter Form 941, may then reduce the fourth quarter wages, tips and compensation reported on line 2, the taxable social security wages reported on line 5a and Medicare wages and the tips reported on line 5c by the excess transit benefits for all four quarters of 2012. By taking advantage of this special administrative procedure, employers will avoid having to file Forms 941-X, and will also avoid having to file 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 transit benefits after repaying or reimbursing the employees or, for refund claims, securing consents from its employees. Similarly, employers that, on or before filing the fourth quarter Form 941, have not repaid or reimbursed some or all employees who received excess transit benefits in 2012 must use Form 941-X to make an adjustment or claim for refund with respect to the excess transit benefits provided to those employees, and must follow the normal procedures.
Employers that have not furnished 2012 Forms W-2 to their employees should take into account the increased exclusion for transit benefits in calculating the amount of wages reported in box 1, Wages, tips, other compensation; box 3, Social security wages; and box 5, Medicare wages and tips. Employers that have repaid or reimbursed their employees for the over-collected FICA taxes prior to furnishing Form W-2 should reduce the amounts of withheld tax reported in box 4, Social security tax withheld, and box 6, Medicare tax withheld, by the amounts of the repayments or reimbursements.
In all cases, however, 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). The same procedures are available to filers of other employment tax returns reporting FICA taxes (e.g., the related Spanish-language return or return for U.S. possessions) and to filers of employment tax returns reporting taxes under the Railroad Retirement Tax Act.