Tax-Free Commuter Benefits

The recently enacted Tax Increase Prevention Act of 2014 (TIPA), retroactively extended enhanced tax-free commuter benefits, but the extension lasts only through December 31, 2014. The IRS explains the complex rules for handling the retroactive increase in its Notice 2015-2.

There are three basic tax-free commuting fringe benefits, other than certain de minimis benefits, that are  available to employees under the tax law:

1. Mass transit passes: An employer may encourage employees to commute using transit passes. These include any pass, token, fare card, voucher or similar item that lets a person travel for free or at a reduced rate. The trip must be on mass transit or vehicles seating at least six adult passengers and operated by a person in the transportation business. Mass transit vehicles include buses, trains and ferries and may be operated publicly or privately.
2. Vanpooling benefits: Employees may qualify for tax-free commuting in an employer-owned “commuter highway vehicle.” The vans must accommodate at least six adult passengers and at least 80 percent of the mileage must be attributed to transporting employees. At least half of the passenger-seating capacity must be occupied during the trips. Under TIPA, the maximum tax-free monthly allowance for both the mass transit and vanpooling benefits is $250 for 2014. Without congressional action, it is scheduled to drop to $130 for 2015, the amount previously set for 2014.
3. Parking fees: An employer may offer parking spaces to employees on or near either its business premises or a location from where the employees commute to work via mass transit, carpooling or vanpooling. It does not include parking at or near employees’ homes. TIPA keeps the maximum monthly tax-free allowance for parking fees at $250 for 2014. It is scheduled to stay at that level for 2015. Qualified transportation benefits can be provided directly by the employer or through a bona fide reimbursement arrangement. However, cash reimbursements for transit passes qualify only if a voucher or a similar item is not readily available for direct distribution by the employer. Readily available is defined as being able to be obtained from a voucher provider that does not impose fare media charges or other restrictions. The vouchers must also only be exchanged for transit passes.

Tax Break for Pedal Pushers

The IRS also encourages employees to bicycle to work. For tax years beginning after 2008, an employer can pay employees as much as $20 a month tax-free for the cost of commuting by bicycle. The payments may cover reasonable costs such as bicycle purchases, equipment purchases, repairs and storage. However, employees who take advantage of this tax break cannot receive any of the other tax-free commuting benefits. This may be a disincentive to some employees.

Highlights of the IRS Guidance

Notice 2015-2 explains how employers can correct FICA tax overpayments resulting from TIPA and report the accurate income and tax amounts on Form 941, Employer’s Quarterly Federal Tax Return, and W-2 Wage and Tax Statements. The notice authorizes a special administrative procedure for employers that provided benefits based on the limits before TIPA was enacted and have treated those excess transit benefits as income and wages. The special procedure is similar, but not identical, to transitional relief the IRS offered in 2013 when it retroactively enhanced benefits for the previous year.

Because most employers filed Form 941 before or on the February 2, 2015 deadline, the special procedure is no longer available to them. To the extent the overcollection has not been repaid to the employee or reimbursed, employers must file Form 941-X, Adjusted Employer’s Quarterly Federal Tax Return or Claim for Refund, and follow the usual procedures for overpayments. They also must obtain written statements from employees confirming that they did not and will not make claims for the over collected FICA tax.

In addition to the special procedure details, other highlights of the notice include:

• Compensation reductions: Employees can’t retroactively increase their 2014 compensation reduction elections to maximize the higher benefit limits. Similarly, they are not allowed to reduce compensation in 2015 to pay for excess 2014 commuting expenses.
• Social Security wage base: An employer must take into account the rule limiting application of the Social Security tax ($117,000 for 2014) to wages that don’t exceed the Social Security wage base. To avoid a mismatch between the taxes and liability reported on Form 941, instructions are provided for applying the tax reduction.
• Impact on Form W-2: The notice says an employee’s Form W-2 must be adjusted to reflect the increased exclusion and any over collected FICA taxes repaid or reimbursed. If repayments or reimbursements are made after W-2s have been furnished to employees, but before they are filed with the Social Security Administration (SSA), the forms must be corrected and redistributed. If the forms have already been filed with the SSA, corrections must be made using Form W-2c, Corrected Wage and Tax Statements.

Lessons to be learned: This can turn into a logistical nightmare for those who are not experienced in handling payroll matters. Employers who treated excess commuting benefits as income and wages for 2014 must move quickly based on the guidance spelled out in the notice. Practical advice: Leave the details to the professionals.

For more information, contact GTM at (518) 373-4111.

© 2015 Thompson Reuters