The IRS recently issued a simplified program to reflect the retroactive application of the PATH Act provision that increased the tax-free benefit employees may receive for employment-related mass transit expenses to match the tax-free benefit for employment-related parking expenses. Taking advantage of this simplified process will require employer action before W-2s and employment tax returns are due (generally, Feb. 1, 2016).
In our previous Alert, we forecasted that this guidance would be similar to guidance issued in 2015 dealing with a temporary retroactive increase to the 2014 mass transit limits, which were described in our January 2015 Alert. That forecast was accurate and the correction procedures for retroactive adjustments that were spelled out in the recently released IRS Notice 2015-12 are essentially the same as the procedures described in that January 2015 Alert.
Lockton Comment: Thankfully, the PATH Act makes transit benefit parity permanent, so this should be the last time a retroactive correction is necessary!
In short, the simplified method allows affected employers (noted below) to make income adjustments on employee W-2s without the need to prepare and issue corrected W-2s. Further, the employment tax and reporting rules would normally require employers to amend each quarterly employment tax filing, but the simplified method allows the employer to make all adjustments on its fourth quarter filing.
Lockton Comment: As a reminder, not all sponsors of pretax transit benefit programs are required to make corrections. Many employer-provided transit benefit programs provided a maximum monthly tax-free amount of transit-related expenses of $130—the amount imposed by the IRS prior to the passage of the PATH Act. No correction is necessary (or permissible) for programs with such a limit.
Other programs allowed employees to receive a benefit in excess of $130 per month—the first $130 was treated as non-taxable and the excess was treated as taxable. Sponsors of these types of programs will want to reach out to their tax preparers to make any necessary corrections.
Affected employers that have already issued W-2s and filed their employment tax returns will make corrections using the traditional correction method, which generally requires issuing W-2Cs and amending each quarterly employment tax return for 2015.